1318)
| RELATED PARTY TRANSACTIONSSUBSEQUENT EVENTS
|
On January 30, 2020, the World Health Organization declared the coronavirus outbreak of 2019 (“COVID-19”) a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which FutureFuel enters into transactionsoperates. FutureFuel continues to take actions to help prevent the spread of COVID-19 and, to date, has had no negative impact on our ability to operate the plant safely and in a way that meets our customers’ demands. It is unknown how long the adverse financial conditions associated with companies affiliated with or controlled by a directorCOVID-19 will last and significant shareholder. Revenues, expenses, prepaid amounts,what the complete effect will be to FutureFuel. To date, FutureFuel is experiencing declining revenue and unpaid amounts related to these transactions are captured in the accompanying consolidated financial statements as related party line items.at times has experienced delayed shipments of select raw material supplies.
Related party revenues areOn March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to provide emergency assistance for individuals, families and businesses affected by the coronavirus pandemic. Under the CARES Act, certain subsidiaries of FutureFuel entered into a loan with Saint Louis Bank pursuant to the Paycheck Protection Program (“PPP”) totaling $8,180 on April 10, 2020. At the time that FutureFuel applied for the PPP loan, it qualified to receive the funds pursuant to the then published eligibility requirements. FutureFuel ensured continued operation as part of the nation’s critical infrastructure on the receipt and availability of these funds. However, the Small Business Administration and Treasury Department subsequently issued new guidance that cast doubt on the ability of public companies to qualify for a PPP loan. As a result, FutureFuel, out of salesan abundance of biodiesel, petrodiesel, blends, other petroleum products, and other similar or related productscaution, determined to these related parties.repay the full amount of the PPP loan on May 5, 2020.
Related party cost of goods sold and distribution are the result of sales of biodiesel, petrodiesel, blends, and other petroleum products to these related parties along with the associated expense from the purchase of natural gas, storage and terminalling services, and income tax and consulting services by FutureFuel from these related parties.
12
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
In Aprilthe absence of 2015, FutureFuel acquired additional historical line spaceany government support from the PPP to mitigate the adverse impact of COVID-19 on a pipeline for $1,408. The acquired line space was recorded as an intangible asset with an indefinite life as there was no foreseeable limit on the time period over whichour business, it is expectedincumbent on FutureFuel to contributemanage its response to cash flows.this situation by drawing on its own resources. This resulted in reduced profitability to FutureFuel. The carrying valuenature and extent of this response will be determined by the duration and severity of the asset was $1,408 as of September 30, 2017 and December 31, 2016. FutureFuel tests the intangible asset for impairment in accordance with ASC 350-30-35-18 through 35-20.on-going pandemic.
15)
| RECENTLY ISSUED ACCOUNTING STATEMENTS
|
The following table provides a brief description of recent Accounting Standard Updates ("ASU") issued by the FASB:
|
| | | | | | |
Standard
| | Description
| | Effective Date
| | Effect on the Financial Statements or Other Significant Matters
|
In February 2016, the FASB issued ASU 2016-02, Leases.
| | The new guidance supersedes the lease guidance under FASB ASC Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. The guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases.
| | Annual periods beginning after December 15, 2018. Early adoption is permitted.
| | The Company is currently evaluating its population of leases, and is continuing to assess all potential impacts of the standard, but currently believes the most significant impact relates to its accounting for logistics equipment. The Company anticipates recognition of additional assets and corresponding liabilities related to leases upon adoption. The Company plans to adopt the standard effective January 1, 2019.
|
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2014-09.
| | The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve the core principle, the guidance establishes the following five steps: 1) identify the contract(s) with a customer, 2) identify the performance obligation in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also details the accounting treatment for costs to obtain or fulfill a contract. Lastly, disclosure requirements have been enhanced to provide sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
| | Annual periods beginning after December 15, 2017. Earlier adoption was permitted, but not before December 15, 2016.
| | The Company is in the process of evaluating the impact of this guidance. This new guidance, will likely result in a change in the nature and extent of the related footnote disclosures. The Company plans to adopt the new guidance when effective and presently anticipates adopting on a modified retrospective basis to each prior reporting period presented with the election of applicable practical expedients.
|
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.444Operations.
Alldollar amountsexpressedasnumbersinthisMD&Aareinthousands(exceptpershareamounts).
Certaintablesmaynotadddueto rounding.
The following Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations of FutureFuel Corp. (“FutureFuel”, “the Company”, “we”, or “our”) should be read together with our consolidated financial statements, including the notes thereto, set forth herein. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Actual results may differ materially from those anticipated in these forward-looking statements. See “Forward Looking“Forward-Looking Information” below for additional discussion regarding risks associated with forward-looking statements.
Unless otherwise stated, all dollar amounts are in thousands.
Overview
Our company is managed and reported in two reporting segments: chemicals segment and biofuels segment.biofuels. Within the chemicalschemical segment are two product groupings: custom chemicals and performance chemicals. The custom product group is comprisedcomposed of specialty chemicals manufactured for a single customer whereas the performance product group is comprisedcomposed of chemicals manufactured for multiple customers. The biofuels segment is comprisedcomposed of one product group. Management believes that the diversity of each segment strengthens the company in the ability to utilize resources and is committed to growing each segment.
COVID-19
In March 2020, the World Health Organization categorized COVID-19 as a pandemic. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. Our priority has been to protect the well-being of our employees, support our customers, obtain materials from our suppliers, and maintain our manufacturing operations. We have been able to continue supplying our products to our customers to date, however, some customers have reduced their near-term demand. We have also been able to find alternative sources for raw materials and inputs to meet our near-term supply requirements.
We are closely monitoring the impact of COVID-19 on all aspects of our business, including its impact on our customers, employees, and suppliers. The extent to which COVID-19 impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
Because the magnitude and duration of the COVID-19 pandemic and its economic consequences are unclear, the pandemic’s impact on our performance is difficult to predict. The three principle areas we anticipate COVID-19 to negatively impact our financial performance are through its impact on our customer demand, the impact on our ability to procure raw materials and inputs from suppliers, and our ability to operate our manufacturing facility.
Customer Demand – Several of our major chemical customers sell the products we produce for them in to markets that have been significantly impacted by COVID-19. The energy and automotive markets in particular have drastically been impacted starting in April which we anticipate will reduce chemical segment revenue the remainder of the year based on current estimates. Low diesel prices and a Renewable Identification Number (RIN) market that has stagnated on uncertainty of required mandates has similarly reduced the value of our finished product. The duration of this impact of COVID-19 is clearly difficult to forecast. We currently expect these markets to recover over time. However, the speed at which these market sectors rebound is highly uncertain and will be determined by reopening of economies and restoration of consumer confidence.
Supply Chain Impact – Supplier shutdowns may result in raw material or input shortages and negatively impact our ability to manufacture products and meet our customers’ demand. In our biofuel segment, we are seeing significant contraction among many of our feedstock suppliers. Closures and idling of restaurants (used cooking oil source), ethanol plants (corn oil source), rendering and poultry plants (tallow and grease source) have impacted our traditional supply chain. In addition, supply shortages may impact the timing of when customer facilities reopen and/or increase production and the speed at which customers ramp up production, negatively impacting demand for our products. Lower demand increases the risk that certain suppliers may face financial issues, potentially impacting their ability to supply.
Operations Impact - Our manufacturing is generally considered critical services and our plant remains open to meet customer demand. In an effort to contain the spread of COVID-19, maintain the well-being of our employees, ensure compliance with governmental requirements or respond to declines in demand from customers, we have had, where possible, employees work from home and temporarily closed portions of our offices. We continue to take actions to help prevent the spread of COVID-19 at work including social distancing, expanded cleaning and sanitization, adjusting work hours and temperature checks. To date we have had no negative impact on our ability to operate the plant safely and in a way that meets our customers’ demands.
Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations. For more information on the risks associated with COVID-19, refer to Part II, Item 1A, "Risk Factors" herein.
Summary of Financial Results
Set forth below is a summary of certain consolidated financial information for the periods indicated.
| | | Three months ended September 30, | |
| | | | | | | | | | | Dollar | | | % | |
| | | 2017 | | | 2016 | | | Change | | | Change | |
Revenues | | $ | 77,606 | | | $ | 69,306 | | | $ | 8,300 | | | | 12.0% | |
Income from operations | | $ | 3,200 | | | $ | 7,841 | | | $ | (4,641 | ) | | | (59.2% | ) |
Net income | | $ | 3,334 | | | $ | 12,868 | | | $ | (9,534 | ) | | | (74.1% | ) |
Earnings per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.08 | | | $ | 0.29 | | | $ | (0.21 | ) | | | (72.4% | ) |
Diluted | | $ | 0.08 | | | $ | 0.29 | | | $ | (0.21 | ) | | | (72.4% | ) |
Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | | $ | 856 | | | $ | 853 | | | $ | 3 | | | | 0.4% | |
Adjusted EBITDA | | $ | 9,553 | | | $ | 10,117 | | | $ | (564 | ) | | | (5.6% | ) |
| | | | | | | | | | | | | | | | | |
| | | Nine months ended September 30, | |
| | | | | | | | | | | Dollar | | | % | |
| | | 2017 | | | 2016 | | | Change | | | Change | |
Revenues | | $ | 199,765 | | | $ | 183,820 | | | $ | 15,945 | | | | 8.7% | |
Income from operations | | $ | 6,049 | | | $ | 21,746 | | | $ | (15,697 | ) | | | (72.2% | ) |
Net income | | $ | 7,564 | | | $ | 37,661 | | | $ | (30,097 | ) | | | (79.9% | ) |
Earnings per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.17 | | | $ | 0.86 | | | $ | (0.69 | ) | | | (80.2% | ) |
Diluted | | $ | 0.17 | | | $ | 0.86 | | | $ | (0.69 | ) | | | (80.2% | ) |
Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | | $ | 2,413 | | | $ | 2,988 | | | $ | (575 | ) | | | (19.2% | ) |
Adjusted EBITDA | | $ | 17,201 | | | $ | 36,328 | | | $ | (19,127 | ) | | | (52.7% | ) |
14
| | | Three Months Ended March 31, | |
| | | | | | | | | | | Dollar | | | % | |
| | | 2020 | | | 2019 | | | Change | | | Change | |
Revenue | | $ | 53,082 | | | $ | 48,501 | | | $ | 4,581 | | | | 9.4 | % |
Income from operations | | $ | 13,979 | | | $ | 1,211 | | | $ | 12,768 | | | | 1054.3 | % |
Net income | | $ | 19,043 | | | $ | 5,499 | | | $ | 13,544 | | | | 246.3 | % |
Earnings per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.44 | | | $ | 0.13 | | | $ | 0.31 | | | | 238.5 | % |
Diluted | | $ | 0.44 | | | $ | 0.13 | | | $ | 0.31 | | | | 238.5 | % |
Capital expenditures (net of customer reimbursements) | | $ | 1,287 | | | $ | 423 | | | $ | 864 | | | | 204.3 | % |
Adjusted EBITDA | | $ | 10,177 | | | $ | 5,415 | | | $ | 4,762 | | | | 87.9 | % |
We use adjusted EBITDA as a key operating metric to measure both performance and liquidity. Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is not a substitute for operating income, net income, or cash flow from operating activities (each as determined in accordance with GAAP) as a measure of performance or liquidity. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP. We define adjusted EBITDA as net income before interest, income taxes, depreciation, and amortization expenses, excluding, when applicable, non-cash stock-based compensation expenses, public offering expenses, acquisition-related transaction costs, purchase accounting adjustments, losses on disposal of property and equipment, gains or losses on derivative instruments, and other non-operating income or expenses. Information relating to adjusted EBITDA is provided so that investors have the same data that we employ in assessing the overall operation and liquidity of our business. Our calculation of adjusted EBITDA may be different from similarly titled measures used by other companies; therefore, the results of our calculation are not necessarily comparable to the results of other companies.
Adjusted EBITDA allows our chief operating decision makers to assess the performance and liquidity of our business on a consolidated basis to assess the ability of our operating segments to produce operating cash flow to fund working capital needs, to fund capital expenditures, and to pay dividends. In particular, our management believes that adjusted EBITDA permits a comparative assessment of our operating performance and liquidity, relative to a performance and liquidity based on GAAP results, while isolatingresults. This measure isolates the effects of certain items, including depreciation and amortization which(which may vary among our operating segments without any correlation to their underlying operating performance,performance), non-cash stock-based compensation expense which(which is a non-cash expense that varies widely among similar companies,companies), and gains and losses on derivative instruments which(which can cause net income to appear volatile from period to period relative to the sale of the underlying physical product.product).
We enter intoutilize commodity derivative instruments primarily to protect our operations from downward movements in commodity prices, and to provide greater certainty of cash flows associated with sales of our commodities. We enter into hedges, and we utilize mark-to-market accounting to account for these instruments. Thus, our results in any given period can be impacted, and sometimes significantly, by changes in market prices relative to our contract price along with the timing of the valuation change in the derivative instruments relative to the sale of biofuel. We include this item as an adjustment as we believe it provides a relevant indicator of the underlying performance of our business in a given period.
Additionally, we invest in marketable securities of certain debt securities (trust preferred stock and exchange-traded debt instruments) and in preferred stock and other equity instruments. The realized and unrealized gains and losses on these marketable securities can fluctuate significantly from period to period. We include this item as an adjustment as we believe it provides a relevant indicator of the underlying performance of our business in a given period.
The following table reconciles adjusted EBITDA with net income, the most directly comparable GAAP performance financial measure.measure, with adjusted EBITDA.
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Adjusted EBITDA | | $ | 9,553 | | | $ | 10,117 | | | $ | 17,201 | | | $ | 36,328 | |
Depreciation | | | (2,927 | ) | | | (2,739 | ) | | | (8,735 | ) | | | (8,068 | ) |
Non-cash stock-based compensation | | | (128 | ) | | | (477 | ) | | | (878 | ) | | | (1,431 | ) |
Interest and dividend income | | | 1,965 | | | | 1,637 | | | | 5,679 | | | | 4,446 | |
Interest expense | | | (43 | ) | | | (9 | ) | | | (129 | ) | | | (22 | ) |
Losses on disposal of property and equipment | | | (68 | ) | | | (10 | ) | | | (145 | ) | | | (147 | ) |
Gains/(losses) on derivative instruments | | | (3,314 | ) | | | 803 | | | | (1,511 | ) | | | (5,375 | ) |
Gains/(losses) on marketable securities | | | 26 | | | | (322 | ) | | | (543 | ) | | | (727 | ) |
Income tax (expense)/benefit | | | (1,730 | ) | | | 3,868 | | | | (3,375 | ) | | | 12,657 | |
Net income | | $ | 3,334 | | | $ | 12,868 | | | $ | 7,564 | | | $ | 37,661 | |
15
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2019 | |
Net income | | $ | 19,043 | | | $ | 5,499 | |
Depreciation | | | 3,004 | | | | 2,725 | |
Non-cash stock-based compensation | | | 49 | | | | - | |
Interest and dividend income | | | (1,967 | ) | | | (2,362 | ) |
Non-cash interest expense and amortization of deferred financing costs | | | 56 | | | | 43 | |
Loss on disposal of property and equipment | | | 2 | | | | 3 | |
(Gain) loss on derivative instruments | | | (6,857 | ) | | | 1,476 | |
Loss (gain) on marketable securities | | | 10,059 | | | | (2,927 | ) |
Income tax (benefit) provision | | | (13,212 | ) | | | 958 | |
Adjusted EBITDA | | $ | 10,177 | | | $ | 5,415 | |
The following table reconciles adjusted EBITDA with cash flows from operations, the most directly comparable GAAP liquidity financial measure.measure, with adjusted EBITDA.
| | | Nine months ended September 30, | | | Three Months Ended March 31, | |
| | | 2017 | | | 2016 | | | 2020 | | | 2019 | |
Net cash provided by operating activities | | | $ | 4,034 | | | $ | (3,289 | ) |
Benefit for deferred income taxes | | | | 22 | | | | 415 | |
Interest and dividend income | | | | (1,967 | ) | | | (2,362 | ) |
Income tax provision | | | | (13,212 | ) | | | 958 | |
(Gain) loss on derivative instruments | | | | (6,857 | ) | | | 1,476 | |
Change in fair value of derivative instruments | | | | 1,874 | | | | 286 | |
Change in operating assets and liabilities, net | | | | 26,282 | | | | 7,930 | |
Other | | | | 1 | | | | 1 | |
Adjusted EBITDA | | $ | 17,201 | | | $ | 36,328 | | | $ | 10,177 | | | $ | 5,415 | |
Benefit for deferred income taxes | | | (1,303 | ) | | | (9,243 | ) | |
Impairment of fixed assets | | | 28 | | | | 178 | | |
Interest and dividend income | | | 5,679 | | | | 4,446 | | |
Income tax (expense)/benefit | | | (3,375 | ) | | | 12,657 | | |
Losses on derivative instruments | | | (1,511 | ) | | | (5,375 | ) | |
Change in fair value of derivative instruments | | | (60 | ) | | | 6,686 | | |
Changes in operating assets and liabilities, net | | | 19,781 | | | | 31,204 | | |
Other | | | - | | | | (2 | ) | |
Net cash provided by operating activities | | $ | 36,440 | | | $ | 76,879 | | |
16
Results of Operations
Consolidated
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2017 | | | 2016 | | | Amount | | | % | | | 2017 | | | 2016 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 77,606 | | | $ | 69,306 | | | $ | 8,300 | | | 12.0% | | | $ | 199,765 | | | $ | 183,820 | | | $ | 15,945 | | | 8.7% | |
Volume/product mix effect | | | | | | | | | | $ | (3,523 | ) | | (5.1% | ) | | | | | | | | | | $ | (20,033 | ) | | (10.9% | ) |
Price effect | | | | | | | | | | $ | 11,823 | | | 17.1% | | | | | | | | | | | $ | 35,978 | | | 19.6% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 5,526 | | | $ | 10,319 | | | $ | (4,793 | ) | | (46.4% | ) | | $ | 13,454 | | | $ | 29,344 | | | $ | (15,890 | ) | | (54.2% | ) |
| | | Three Months Ended March 31, | |
| | | | | | | | | | | Change | |
| | | 2020 | | | 2019 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | |
Revenues | | $ | 53,082 | | | $ | 48,501 | | | $ | 4,581 | | | | 9.4 | % |
Volume/product mix effect | | | | | | | | | | $ | 12,762 | | | | 26.3 | % |
Price effect | | | | | | | | | | $ | (8,181 | ) | | | (16.9 | %) |
| | | | | | | | | | | | | | | | | |
Gross profit | | $ | 16,399 | | | $ | 3,262 | | | $ | 13,137 | | | | 402.7 | % |
Consolidated sales revenue in the three and nine months ended September 30, 2017March 31, 2020 increased $8,300 and $15,945, respectively,$4,581 compared to the three and nine months ended September 30, 2016.March 31, 2019. This increase primarily resulted from higher prices in the biofuel segment and increased sales volumes in the chemical segment. In the nine-month comparison period, the increase from higher prices in the biofuelbiofuels segment wasthat were partially offset by lower sales volumes largely fromdecreased prices of biodiesel in the expiration of the federal blenders’ tax credit (“BTC”).three-month period.
Gross profit in the three and nine months ended September 30, 2017 decreased $4,793 and $15,890, respectively,March 31, 2020 increased $13,137 compared to the three and nine months ended September 30, 2016. InMarch 31, 2019. This increase primarily resulted from: i) the biofuel segment, this decrease largely resulted from the absence of the BTC which expired on December 31, 2016. We also experienced a reductionblenders’ tax credit (“BTC”) being in pipeline profitseffect for the ninecurrent period versus not being in effect in the prior three-month period; and ii) the change in the unrealized and realized activity in derivative instruments with a gain of $6,857 in the three months ended September 30, 2017March 31, 2020 as compared to a loss of $1,476 in the prior year period.
Another significant impact to the reduction inthree months ended March 31, 2019. Also benefiting gross profit in both the ninethree months ended September 30, 2017, as compared to the prior year period,March 31, 2020 and 2019 was the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment reduced gross profit $5,329 in the nine months ended September 30, 2017 and increased gross profit $1,845 in the nine months ended September 30, 2016. This change in LIFO resulted in a lower of cost or market adjustment of $1,877 in the threeby $1,319 and nine months ended September 30, 2016 and no such adjustment was necessary in the three and nine months ended September 30, 2017. Please see footnote 2 for additional discussion.$1,637, respectively.
Also contributing to the reduction in gross profit OperatingExpenses
Operating expenses increased $369 in the three months ended September 30, 2017, was the loss in the unrealized and realized activity in derivative instruments of $3,314,March 31, 2020, as compared to a gain of $803, in the prior year period. The change in the derivative activity in the nine months ending September 30, 2017 favorably impacted gross profit with a loss of $1,511, as compared to a loss of $5,375 in the prior year period.
three-months ended March 31, 2019. This slight increase was primarily from increased research and development expenses.
OperatingIncome Tax ProvisionExpenses
The effective tax rate for the three-months ended March 31, 2020 reflects the positive effect of the reinstatement of certain tax credits and incentives for 2020, the most significant of which was the BTC and Small Agri-biodiesel Producer Tax Credit. The BTC and Small Producer Agri-biodiesel Producer Credit was retroactively extended for 2018 and 2019 on December 20, 2019 and further extended through December 31, 2022. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“CARES Act”). The CARES Act provides that Net Operating expenses decreased from $2,478Losses (“NOLs”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 shall be treated as a carryback to $2,326 or $152 ineach of the 5 preceding taxable years unless the taxpayer elects to forego the carryback. This enacted NOL provision had a positive effect on the effective tax rate for the three months ended September 30, 2017 and from $7,598March 31, 2020 as FutureFuel will be able to $7,405 or $193 in the nine months ended September 30, 2017, as comparedcarryback its 2019 federal NOL to the three and nine months ended September 30, 2016, respectively. This reduction in both periods was froma year with a higher tax rate rather than forward to a year with a lower compensation cost partially offset by higher research and development expense.
Provision/(Benefit)for IncomeTaxestax rate.
The effective tax rate for the three and nine months ended September 30, 2017, reflects our expected tax rate on reported operating income before income tax. Our effective tax rate in the three and nine months ended September 30, 2017,March 31, 2019 reflects the elimination of certain tax credits and incentives for 2017.
The effective tax rate for the three and nine months ended September 30, 2016, reflects our expected tax rate on reported operating income earnings before income tax. Our effective tax rate in the three and nine months ended September 30, 2016, reflects the positiveunfavorable effect of the reinstatement ofBTC and Small Producer Agri-biodiesel Producer Credit not being in the certain tax credits and incentiveslaw for 2016. In addition, during the secondfirst quarter of 2016,2019. The rate was also favorably impacted from a retroactive research and development credit for a prior year in a state where FutureFuel booked a tax benefit related to the reversal of a state’s treatment of the taxability of the tax credits and incentives.does significant business.
17
There were no unrecognized tax benefits at March 31, 2020 or December 31, 2019.
UnrecognizedFutureFuel recorded interest and penalties, net, as a component of income tax benefits totaled $2,052provision and $2,056had accrued balances of ($3) and ($557) at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively.
Net Income
Net income for the three and nine months ended September 30, 2017 decreased $9,534 and $30,097, respectively,March 31, 2020 increased $13,544 as compared to the same periodsperiod in 2016. The decrease2019. This increase resulted primarily from the lack of the benefit ofbiodiesel tax credits and incentives that were in effect in the three and nine months ended September 30, 2016 whichMarch 31, 2020 that were not in effect for 2019 (see Note 2) and tax benefits in effect in the three and nine months ended September 30, 2017. Additionally,first quarter of 2020 not in effect for the adjustmentssame period in 2019, see the carrying value of our inventory as determined utilizingincome tax provision discussion above. Partially offsetting this increase was the LIFO method of inventory accounting negatively impacted net income in both the three and nine months ended September 30, 2017. In comparison, net income in the three months ended September 30, 2016 was negatively impacted by this adjustment, but this adjustment benefited net income in the nine months ended September 30, 2016.unrealized loss on equity securities.
ChemicalSegment
| | | Three Months Ended March 31, | |
| | | | | | | | | | | Change | |
| | | 2020 | | | 2019 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | |
Revenues | | $ | 27,693 | | | $ | 27,352 | | | $ | 341 | | | | 1.2 | % |
Volume/product mix effect | | | | | | | | | | $ | 879 | | | | 3.2 | % |
Price effect | | | | | | | | | | $ | (538 | ) | | | (2.0 | %) |
| | | | | | | | | | | | | | | | | |
Gross profit | | $ | 8,014 | | | $ | 7,309 | | | $ | 705 | | | | 9.6 | % |
ChemicalsSegment
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2017 | | | 2016 | | | Amount | | | % | | | 2017 | | | 2016 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 28,167 | | | $ | 24,299 | | | $ | 3,868 | | | 15.9% | | | $ | 77,875 | | | $ | 73,930 | | | $ | 3,945 | | | 5.3% | |
Volume/product mix effect | | | | | | | | | | $ | 2,937 | | | 12.1% | | | | | | | | | | | $ | 2,774 | | | 3.8% | |
Price effect | | | | | | | | | | $ | 931 | | | 3.8% | | | | | | | | | | | $ | 1,171 | | | 1.6% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 8,060 | | | $ | 7,853 | | | $ | 207 | | | 2.6% | | | $ | 20,401 | | | $ | 22,722 | | | $ | (2,321 | ) | | (10.2% | ) |
SalesChemical revenue in the three months ended September 30, 2017March 31, 2020 increased by $3,8681.2% or $341 compared to the three months ended September 30, 2016. Sales revenueMarch 31, 2019. Revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months ended September 30, 2017March 31, 2020 totaled $23,593,$23,760, an increase of $3,138$60 from the comparablesame period in 2016. This increase was primarily attributed2019. Increased sales of products sold to increasedthe energy market were mostly offset by declines in agrochemical sales volumes in the agrochemical and energy markets.volumes. Performance chemicals (comprised(composed of multi-customer products which are sold based on specification) sales revenues were $4,574revenue was $3,933 in the three months ended September 30, 2017,March 31, 2020, an increase of $730$281 from the three months ended September 30, 2016.March 31, 2019. This increase was primarily from increased sales of polymer modifiers and specialty additives.
Sales revenue in the nine months ended September 30, 2017 increased $3,945 compared to the nine months ended September 30, 2016. This increase was primarily attributed to increased sales volume in the agrochemical and energy markets, new customer product sales and increased amortization of deferred revenue which were mostly offset by the reduced price and volume of the laundry detergent additive. Performance chemical sales revenue were down $1,096 to $12,686, in the nine month period ended September 30, 2017. This decrease was primarily fromglycerin based on a reduced sales volumessupply of a polymer modifier product. imported material.
Gross profit for the chemicalschemical segment for the three months ended September 30, 2017 March 31, 2020, increased by $2079.6% or $705 when compared to the three months ended September 30, 2016. Factors positively impacting the three-month comparisonsame period of gross profit were from the change in adjustments2019. This increase was driven mostly by favorable sales volume in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting and volume growth in the agrochemical and energy markets. Items negatively impacting gross profit were a decline in the sales volume and price of the laundry detergent additive and a change in product mix.market.
Gross profit for the chemicals segment for the nine months ended September 30, 2017 decreased by $2,321 when compared to the nine months ended September 30, 2016. Factors negatively impacting the nine-month comparison of gross profit were from the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting, a decline in the sales volume and price of the laundry detergent additive, and a decline in the sales volume of the polymer modifier product. Positively impacting the nine-month comparison period was the volume growth in the agrochemical and energy markets.
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Biofuels Segment
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three Months Ended March 31, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2017 | | | 2016 | | | Amount | | | % | | | 2017 | | | 2016 | | | Amount | | | % | | | 2020 | | | 2019 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 49,439 | | | $ | 45,007 | | | $ | 4,432 | | | 9.8% | | | $ | 121,890 | | | $ | 109,890 | | | $ | 12,000 | | | 10.9% | | | $ | 25,389 | | | $ | 21,149 | | | $ | 4,240 | | | | 20.0 | % |
Volume/product mix effect | | | | | | | | | | $ | (6,460 | ) | | (14.4% | ) | | | | | | | | | | $ | (22,807 | ) | | (20.8% | ) | | | | | | | | | | $ | 11,883 | | | | 56.2 | % |
Price effect | | | | | | | | | | $ | 10,892 | | | 24.2% | | | | | | | | | | | $ | 34,807 | | | 31.7% | | | | | | | | | | | $ | (7,643 | ) | | | (36.1 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | (2,534 | ) | | $ | 2,466 | | | $ | (5,000 | ) | | (202.8% | ) | | $ | (6,947 | ) | | $ | 6,622 | | | $ | (13,569 | ) | | (204.9% | ) | | $ | 8,385 | | | $ | (4,047 | ) | | $ | 12,432 | | | | (307.2 | %) |
Biofuels sales revenue in the three and nine months ended September 30, 2017March 31, 2020 increased $4,432 and $12,000 when$4,240 as compared to the three and nine months ended September 30, 2016. This increase was primarily from higher prices onsame period of 2019. The biodiesel biodiesel RINs, and biodiesel blends. The sale of separated, internally generated RINs, comprised a larger component of revenue in the current quarter and nine-month periodblend volumes increased as compared to the prior year, periods. In addition, pipeline sales increased to $1,852primarily from $1,509a stronger market with the BTC in effect in the current quarter and not in effect in the prior year period. Partially offsetting this increase in the three months ended September 30, 2017March 31, 2020 as compared to the same period of 2019, was lower selling prices. Global fuel markets were impacted by reduced demand for oil caused by the economic impact of the COVID-19 pandemic and 2016, respectively. For the nine-month comparison period, pipeline sales decreaseda lack of support by oil producing nations to $1,852 from $7,390. cut supply. These factors resulted in significant declines in petroleum and biodiesel oil prices.
RevenueBiofuels revenue from common carrier pipelines varies as its revenue recognition depends upon whether a transaction is bought from and sold to the same party. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another (including buy/sell agreements) are combined and recorded on a net basis. Additionally, revenue from common carrier pipelines fluctuates with market conditions. Revenue from net transactions increased $169 in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.
A significant portion of our biodiesel sold in 2017 was to two major refiners/blenders and one major refinerrefiner/blender in 2016.2019 and in the first quarter of 2020 there were no significant customer concentrations. No assurances can be given that we will continue to sell to such major refiners, or, if we do sell, the volume we will sell or the profit margin we will realize. We do not believe that the loss of these customersthis customer would have a material adverse effect on our biofuels segment or on us as a whole in that:because: (i) unlike our custom manufacturing products, biodiesel is a commodity with a large potential customer base; (ii) we believe that we could readily sell our biodiesel to other customers as potential demand from other customers for biodiesel exceeds our production capacity; (iii)(ii) our sales to these customers are not under fixed terms and the customers have no fixed obligation to purchase any minimum quantities except as stipulated by short termshort-term purchase orders; and (iv)(iii) the prices we receive from these customers are based upon then-market rates, as would be the case with sales of this commodity to other customers.
Biofuels gross profit was $8,385 in the three and nine months ended September 30, 2017 decreased $5,000 and $13,569 when March 31, 2020, as compared to a gross loss of $4,047 in the three and nine months ended September 30, 2016. Costsame period of goods sold2019, primarily from: i) increased as a result ofsales volumes given improved market conditions with the absence of the blenders’ tax credit which expired December 31, 2016 andBTC in effect (which was not in effect in the prior year’s period. Gross profits were reduced byyear period); ii) the change in the activity in derivative instruments with a gain of $6,857 in the three months ended March 31, 2020, as compared to a loss of $1,476 in the same period of 2019. Also benefiting gross profit in both three-month periods ended March 31, 2020 and 2019 was the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment decreasedincreased gross profit $383$817 and $4,276 in the three and nine months ended September 30, 2017, respectively, compared to a decrease of $336 and an increase of $898 in the three and nine months ended September 30, 2016,$1,110, respectively. This change in LIFO resulted in a lower of cost or market adjustment of $1,877, in the three and nine months ended September 30, 2016. No such adjustment impacted gross profit in the three and nine months ended September 30, 2017. Please see footnote 2 for additional discussion.
Biofuels gross profit was further reduced by the change in the activity in derivative instruments in comparison to the prior year quarter with a loss of $3,314 as compared to a gain of $803 in the three months ended September 30, 2017 and 2016, respectively. The change in the derivative activity in the nine months ending September 30, 2017 favorably impacted gross profit with a loss of $1,511, as compared to a loss of $5,375 in the prior year period. In order to better manage the commodity price risk caused by market fluctuations in biofuel prices, we may enter into exchange traded commodity futures and options contracts. We account for these derivative instruments in accordance with accounting standards whereby the fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statement of operations as a component of cost of goods sold within the biofuels segment.
FutureFuel recognizesrecognize all derivative instruments as either assets or liabilities at fair value in itsour consolidated balance sheet. FutureFuel’ssheets. Our derivative instruments do not qualify for hedge accounting under the specific guidelines of ASC 815-20-25,Topic 815, DerivativesandHedging. None of the derivative instruments are designated and accounted for as hedges primarily due primarily to the extensive record keeping requirements.
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The volumes and carrying values of FutureFuel’sour derivative instruments were as follows:
| | | September 30, 2017 | | | December 31, 2016 | |
| | | Number of Contracts Short | | | Fair Value | | | Number of Contracts Short | | | Fair Value | |
Regulated options, included in other current assets | | 200 | | | $ | (162 | ) | | - | | | $ | - | |
Regulated fixed price future commitments, included in other current assets | | 182 | | | $ | (36 | ) | | 135 | | | $ | (258 | ) |
| | | Asset (Liability) | |
| | | March 31, 2020 | | | December 31, 2019 | |
| | | Contract Quantity Short | | | Fair Value | | | Contract Quantity Short | | | Fair Value | |
Regulated fixed price future commitments | | | 128 | | | $ | 1,607 | | | | 140 | | | $ | (267 | ) |
*All derivative instruments are entered into with the standard contract terms and conditions in accordance with major trading authorities of the New York Mercantile Exchange.
Critical Accounting Estimates
Revenue Recognition
The Company recognizes revenue under Topic 606, Revenue from Contracts with Customers. Certain long-term contracts had upfront non-cancellable payments considered material rights. The Company applied the renewal option approach in allocating the transaction price to the material rights. For each of these contracts, the Company estimated the expected contractual volumes to be sold at the most likely expected sales price as a basis for allocating the transaction price to the material right. Estimates are updated quarterly on a prospective basis. These custom chemical contracts have payment terms of 30 days. See Note 3 to our consolidated financial statements.
For most product sales, revenue is recognized when product is shipped from our facilities and risk of loss and title have passed to the customer, which is in accordance with our customer contracts and the stated shipping terms. Nearly all custom manufactured products are manufactured under written contracts.master service agreements. Performance chemicals and biodiesel are generally sold pursuant to the terms of written purchase orders. In general, customers do not have any rights of return, except for quality disputes. All of our products are tested for quality before shipment, and historically returns have been inconsequential. We do not offer rebates, or other warranties.except those related to the BTC.
Biodiesel selling prices can at times fluctuate based on the timing of unsold, internally generated RINs. From time to time, sales of biodiesel are on a “RINs-free” basis. Such method of selling results in applicable RINs being held. The value of the RINs is not reflected in revenue until such time as the RIN sale has been completed.
Revenue from bill and holdbill-and-hold transactions in which a performance obligation exists is recognized when the total performance obligation has been met and title tocontrol of the product has transferred. Bill and holdBill-and-hold transactions for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 were related to specialtycustom chemicals customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use.use by the customer. These sales were subject to written monthly purchase orders with agreement that production was reasonable. The inventoryproduct was custom manufactured and stored at the customer’s request and could not be sold to another buyer. Credit and payment terms for bill and holdbill-and-hold customers are similar to other specialtycustom chemicals customers. Sales revenueRevenue under bill and holdbill-and-hold arrangements were $4,519$10,153 and $6,759$11,756 for the three months ended September 30, 2017March 31, 2020 and 2016, and $12,477 and $17,103 for the nine months ended September 30, 2017 and 2016,2019, respectively.
Liquidity and Capital Resources
Our net cash provided by (used in)from operating activities, investing activities, and financing activities for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 are set forth in the following chart.table.
| | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | |
Net cash provided by operating activities | | $ | 36,440 | | | $ | 76,879 | |
Net cash used in investing activities | | $ | (14,252 | ) | | $ | (40,444 | ) |
Net cash used in financing activities | | $ | (108,215 | ) | | $ | (8,111 | ) |
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2019 | |
Net cash provided by (used in) operating activities | | $ | 4,034 | | | $ | (3,289 | ) |
Net cash provided by (used in) investing activities | | $ | 3,838 | | | $ | (3,038 | ) |
Net cash used in financing activities | | $ | (3,101 | ) | | $ | (2,624 | ) |
We believe that existing cash balances and cash flow to be generated from operating activities and borrowing capacity under the amended and restated credit agreement will be sufficient to fund operations, product development, cash dividends, and capital requirements for the foreseeable future. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition.
Operating Activities
Cash from operating activities decreased from $76,879 of cashwas provided by operating activities of $4,034 in the first nine monthsquarter of 20162020 as compared to $36,440$3,289 of cash provided by operating activitiesused in the first nine monthsquarter of 2017.2019. This decrease$7,323 increase was primarily attributable to the decrease of $30,097change in net income the decreaseof $5,499 in the first quarter of 2019 compared to $19,043 for the same period in 2020 for a net increase of $13,544. Also contributing to the cash inflows from operations in the first quarter of 2020, by comparison to the first quarter of 2019, there was a net cash inflow resulting from fair value adjustments to equity securities of approximately $12,578 and from less cash outflows from inventory reductions of $10,048 during the first quarter of 2020 compared to the first quarter of 2019. Partially offsetting these net cash inflows, there was a net change in the income tax receivable, demonstrating a cash outflow of $13,587 in the first quarter of 2020 as compared to a cash inflow of $1,340, and a net change in accounts receivable, including accounts receivable-related parties, demonstrating a cash outflow of $13,252 and inventory of $8,439 offset by the increase$13,628 in the changefirst quarter of 2020 as compared to a cash inflow of $400 in accounts payablethe first quarter of $11,278.
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2019.
Investing Activities
Cash used infrom investing activities was $14,252 in the first nine monthsincreased from $3,038 of 2017 compared to $40,444cash used in the first ninethree months of 2016. This2019 to $3,838 of cash provided by investing activities in the first three months of 2020. Of the $6,876 change, $8,132 was primarily the result of a decrease in net purchases of marketable securities in the first ninethree months of 20172020 compared to the first ninethree months of 2016.2019. Such net purchases totaled $10,882 and $33,328,$964, in the first ninethree months of 2017 and 2016, respectively.2020, compared to $9,096 in net purchases in the first three months of 2019. Our capital expenditures and customer reimbursements for capital expenditures for the three months ended March 31, 2020 and 2019 are summarized in the following table:
| | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | |
Cash paid for capital expenditures and intangibles | | $ | 2,614 | | | $ | 3,107 | |
Cash received as reimbursement of capital expenditures | | $ | (201 | ) | | $ | (119 | ) |
Cash paid, net of reimbursement, for capital expenditures | | $ | 2,413 | | | $ | 2,988 | |
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2019 | |
Cash paid for capital expenditures | | $ | 1,608 | | | $ | 2,246 | |
Cash received from customers as reimbursement of capital expenditures* | | $ | (321 | ) | | $ | (1,823 | ) |
Cash paid for capital expenditures, net of reimbursements | | $ | 1,287 | | | $ | 423 | |
*This receipt of cash was reported as an increase in deferred revenue in cash flows from operations.
Financing Activities
Cash used in financing activities increased to $108,215was $3,101 and $2,624, in the first ninethree months ended March 31, 2020 and 2019, respectively. The increase of 2017 from $8,111$477 was related to Debt origination costs in the first ninethree months ended March 31, 2020 from the amendment of 2016. This change is primarily the result ofour existing credit facility. The remaining $2,624 resulted from payments of dividends on our common stock in the first ninethree months of 2017 compared to the first nine months of 2016. The payment of dividends totaled $108,0632020 and $7,869 in the first nine months of 2017 and 2016, respectively.2019.
Credit Facility
Effective April 16, 2015,March 30, 2020, we entered into a new $150,000 secured committedan amended and restated credit facilityagreement with a syndicated group of commercial banks. On May 25, 2016, we increased the facility $15,000.banks for $100,000. The loan is a revolving facility, the proceeds of which may be used for our working capital, capital expenditures, and general corporate purposes. The facility terminates on April 16, 2020.March 30, 2025. See Note 6 – “Borrowings” in 10 to our consolidated financial statements ended September 30, 2017 for additional information regarding our Credit Agreement.
We intend to fund future capital requirements for our businesses from cash flow as well as from existing cash, cash investments, and, if the need should arise, borrowings under our credit facility. We do not believe there will be a need to issue any securities to fund such capital requirements.
Dividends
In the first three quartersthree months of 2017,2020 and 2019, we paid a regular quarterly cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $2,625 per quarter$2,624 in the first, second and third quarters of 2017.each period. In the first quarter of 2017,three months ended March 31, 2020, we also paiddeclared a special cash dividend of $2.29$3.00 per share on our common stock. This special cash dividend amounted to $100,188. Total cash dividends paid were $108,063 in the first nine months of 2017.
In the first three quarters of 2016, we paid a regular cash dividend in the amount of $0.06 per share$131,230 that was payable on our common stock. The regular cash dividend amounted to $2,623 in the first, second, and third quarters of 2016, for aggregate dividend payments of $7,869 in the first nine months of 2016.
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April 17, 2020.
Capital Management
As a result of our initial equity offering, our subsequent positive operating results, the exercise of warrants, and the issuance of shares in our at-the-market offering, we accumulated excess working capital. Some of this excess working capital has been paid out as special and regular cash dividends. Additionally, regular and special cash dividends will be paid in 2017,2020, as previously reported. Third parties have not placed significant restrictions on our working capital management decisions.
A significant portion of these funds was held in cash or cash equivalents at multiple financial institutions. In the periods ended September 30, 2017 March 31, 2020 and December 31, 2016,2019, we also had investments in certain preferred stock, trust preferred securities, exchange tradedexchange-traded debt instruments, and other equity instruments. We classify these investments as current assets in the accompanying consolidated balance sheets and designate themthe debt securities as being “available-for-sale.” Accordingly, theythe debt securities are recorded at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity. We also held equity securities with readily available market values. These equity instruments are recorded at fair value, with the unrealized gains and losses reported as a component of net income. The fair value of these preferred stock, trust preferredthe debt securities exchange traded debt instruments, and other equity instruments totaled $123,588$59,644 and $106,146$73,620 at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively.
Lastly, we maintain depositary accounts such as checking accounts, money market accounts, and other similar accounts at selected financial institutions.
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Off- Balance Sheet Arrangements
We engage in two types of hedging transactions. First, we hedge our biofuels sales through the purchase and sale of futures contracts and options on futures contracts of energy commodities. This activity was captured onin our consolidated balance sheetsheets at September 30, 2017 March 31, 2020 and December 31, 2016.2019. Second, we hedge our biofuels feedstock through the execution of purchase contracts and supply agreements with certain vendors.vendors or they meet the normal purchase and normal sales exception of ASC 815 Derivatives and Hedging. These hedging transactions are recognized in earnings and were not recorded onin our consolidated balance sheetsheets at September 30, 2017March 31, 2020 or December 31, 20162019 because they do not meet the definition of a derivativehedge instrument as defined under GAAP. The purchase of biofuels feedstock generally involves two risk components: basis and price. Basis covers any refining or processing required as well as transportation. Price covers the purchases of the actual agricultural commodity. Both basis and price fluctuate over time. A supply agreement with a vendor constitutes a hedge when we have committed to a certain volume of feedstock in a future period and have fixed the basis for that volume.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
All dollar amounts expressed as numbers in these Market Risk Disclosures are in thousands (except per share amounts).
In recent years, general economic inflation has not had a material adverse impact on our costs and, as described elsewhere herein, we have passed some price increases along to our customers. However, we are subject to certain market risks as described below.
Market risk represents the potential loss arising from adverse changes in market rates and prices. Commodity price risk is inherent in the chemicals and biofuels business both with respect to inputs (electricity, coal, raw materials, biofuels feedstock, etc.) and outputs (manufactured chemicals and biofuels).
We seek to mitigate our market risks associated with the manufacturing and sale of chemicals by entering into long-term sale contracts that include contractual market price adjustment protections to allow changes in market prices of key raw materials to be passed on to the customer. Such price protections are not always obtained, however, and some raw material price risk remains significant.
In order to manage price risk caused by market fluctuations in biofuels prices, we may enter into exchange tradedexchange-traded commodity futures and options contracts. We account for these derivative instruments in accordance with ASC 815-20-25, Topic 815, Derivatives and Hedging. Under this standard, the accounting for changes in the fair value of a derivative instrument depends upon whether it has been designated as an accounting hedging relationship and, further, on the type of hedging relationship. To qualify for designation as an accounting hedging relationship, specific criteria must be met and appropriate documentation maintained. We had no derivative instruments that qualified under these rules as designated accounting hedges in the first ninethree months of 20172020 or 2016.2019. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the consolidated statement of operations as a component of cost of goods sold within the biodiesel segment.
Our immediate recognition of derivative instrument gains and losses can cause net income to be volatile from period to period due to the timing of the change in value of the derivative instruments relative to the volume of biofuel being sold. As of September 30, 2017At March 31, 2020 and December 31, 2016,2019, the fair values of our derivative instruments were a net asset of $1,607 and a net liability in the amount of $198 and $258,$267, respectively.
Our gross profit will be impacted by the prices we pay for raw materials and conversion costs (costs incurred in the production of chemicals and biofuels) for which we do not possess contractual market price adjustment protection. These items are principally comprisedcomposed of crude corn oil and yellow grease and petrodiesel. The availability and price of these items are subject to wide fluctuations due to unpredictable factors such as weather conditions, overall economic conditions, governmental policies, commodity markets, and global supply and demand.
We prepared a sensitivity analysis of our exposure to market risk with respect to key raw materials and conversion costs for which we do not possess contractual market price adjustment protections, based on average prices for the first ninethree months of 2017.2020. We included only those raw materials and conversion costs for which a hypothetical adverse change in price would result in a 1% or greater decrease in gross profit. Assuming that the prices of the associated finished goods could not be increased and assuming no change in quantities sold, a hypothetical 10% change in the average price of the commodity listed below would result in the following change in gross profit.
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(VolumeVolume and dollars in thousands)
Item | | Volume Requirements (a) | | Units | | Hypothetical Adverse Change in Price | | Decrease in Gross Profit | | Percentage Decrease in Gross Profit |
Biodiesel Feedstocks | | 247,487 | | LB | | 10% | | $ 7,267 | | 54.0% |
Ultra Low Sulfur Diesel | | 12,150 | | GAL | | 10% | | $ 1,962 | | 14.6% |
Methanol | | 102,450 | | LB | | 10% | | $ 1,660 | | 12.3% |
Electricity | | 86 | | MWH | | 10% | | $ 415 | | 3.1% |
Natural Gas | | 1,006 | | MCF | | 10% | | $ 343 | | 2.6% |
Sodium Methylate | | 8,287 | | LB | | 10% | | $ 332 | | 2.5% |
Coal | | 28 | | Ton | | 10% | | $ 177 | | 1.3% |
(a) Volume requirements and average price information are based upon volumes used and prices obtained for the nine months ended September 30, 2017. Volume requirements may differ materially from these quantities in future years as our business evolves. |
Item | | Volume Requirements (a) | | Units | | Hypothetical Adverse Change in Price | | | Decrease in Gross Profit | | | Percentage Decrease in Gross Profit | |
Biodiesel feedstocks | | | 97,206 | | LB | | | 10.0 | % | | | 2,625 | | | | 4.9 | % |
(a) Volume requirements and average price information are based upon volumes used and prices obtained for the three months ended March 31, 2020. Volume requirements may differ materially from these quantities in future years as our business evolves. |
We had no borrowings as of September 30, 2017at March 31, 2020 or December 31, 20162019 and, as such, we were not exposed to interest rate risk for those periods. Due to the relative insignificance of transactions denominated in foreign currency, we consider our foreign currency risk to be immaterial.
Item 4. Controls and Procedures.
Under the supervision and with the participation of our chief executive officer and our principal financial officer and other senior management personnel, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and our principal financial officer have concluded that these disclosure controls and procedures as of September 30, 2017at March 31, 2020 were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
There were no changes in our internal control over financial reporting during our last fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to, nor is any of our property subject to, any material pending legal proceedings, other than ordinary routine litigation incidental to our business. However, from time to time, we may be a party to, or a target of, lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which we expect to be handled and defended in the ordinary course of business. While we are unable to predict the outcome of any matters currently pending, we do not believe that the ultimate resolution of any such pending matters will have a material adverse effect on our overall financial condition, results of operations, or cash flows. However, adverse developments could negatively impact earnings or cash flows in future periods.
Item 1A. Risk Factors.
There have been no material changes to the risk factors we previously disclosed in Item 1A of our Form 10-K, Annual
Report for the year ended December 31, 20162019 filed with the SEC on March 16, 2017.13, 2020, except for the addition of the Risk Factor below:
We are subject to risks associated with public health threats and epidemics, including the novel coronavirus ("COVID-19").
We are subject to risks associated with public health threats and epidemics, including the global health concerns relating to the COVID-19 pandemic. The global pandemic has adversely impacted and is likely to further adversely impact our business and markets, including our workforce and operations and the operations of our customers and suppliers. In particular, we may experience material financial or operational impacts, including:
• | Significant volatility or reductions in demand for our products; |
• | Delays in obtaining regulatory clearances and approvals to market our products; |
• | The failure of third parties on which we rely to meet their obligations to the Company to supply the Company with methanol, which the Company requires for several manufacturing processes; |
• | The failure of third parties on which we rely to meet their other obligations to the Company, or significant disruptions in their ability to do so; or |
• | The inability to meet our customers’ needs due to disruptions to our operations or the operations of our third-party suppliers, contractors, logistics partners or customers including disruptions to production, development, manufacturing, administrative and supply operations and arrangements. |
The extent to which the COVID-19 global pandemic and measures taken in response thereto impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and our results of operations and many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019 may be heightened.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
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Special Note Regarding Forward-Looking Information
This report, and the documents incorporated by reference into this report contain forward-looking statements. Forward- lookingForward-looking statements deal with our current plans, intentions, beliefs, and expectations, and statements of future economic performance. Statements containing such terms as “believe,” “do not believe,” “plan,” “expect,” “intend,” “estimate,” “anticipate,” and other phrases of similar meaning are considered to contain uncertainty and are forward-looking statements. In addition, from time to time we or our representatives have made or will make forward-looking statements orally or in writing. Furthermore, such forward-looking statements may be included in various filings that we make with the SEC, or in press releases, or in oral statements made by or with the approval of one of our authorized executive officers.
These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause actual results to differ include, but are not limited to, those set forth under the headings “Risk Factors” and “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in FutureFuel’s Form 10-K Annual Report for the year ended December 31, 20162019 and in our future filings made with the SEC. You should not place undue reliance on any forward-looking statements contained in this report which reflect our management’s opinions only as of their respective dates. Except as required by law, we undertake no obligation to revise or publicly release the results of any revisions to forward-looking statements. The risks and uncertainties described in this report and in subsequent filings with the SEC are not the only ones we face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that we currently believe are immaterial to our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If any such risks occur, our business, operating results, liquidity, and financial condition could be materially affected in an adverse manner. You should consult any additional disclosures we have made or will make in our reports to the SEC on Forms 10-K, 10-Q, and 8-K, and any amendments thereto. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.
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S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FUTUREFUEL CORP. | |
| | |
By: | /s/ Paul A. Novelly | |
| | |
Paul A. Novelly, Chairman and Chief | |
Executive Officer | |
| | |
Date: November 9, 2017 May 8, 2020 | |
| |
| | |
By: | /s/ Rose M. Sparks | |
| | |
Rose M. Sparks, Chief Financial Officer | |
and Principal Financial Officer | |
| | |
Date: November 9, 2017 May 8, 2020 | |
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