Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
On April 16, 2015, FutureFuel, with FutureFuel Chemical as the borrower, and certain of FutureFuel’s other subsidiaries, as guarantors, entered into a $150,000 secured and committed credit facility with the lenders party thereto, Regions Bank as administrative agent and collateral agent, and PNC Bank, N.A., as syndication agent. On May 25, 2016, FutureFuel increased the credit facility by $15,000. The credit facility consists of a five-year revolving credit facility in a dollar amount of up to $165,000, which includes a sublimit of $30,000 for letters of credit and $15,000 for swingline loans (collectively, the “Credit Facility”).
The interest rate floats at the following margins over LIBOR or base rate based upon the leverage ratio from time to time:
Consolidated Leverage Ratio | | Adjusted LIBOR Rate Loans and Letter of Credit Fee | | Base Rate Loans | | Commitment Fee |
< 1.00:1.0 | | | | | 1.25% | | | | 0.25% | | | | 0.15% | |
≥ 1.00:1.0 | And | < 1.50:1.0 | | | 1.50% | | | | 0.50% | | | | 0.20% | |
≥ 1.50:1.0 | And | < 2.00:1.0 | | | 1.75% | | | | 0.75% | | | | 0.25% | |
≥ 2.00:1.0 | And | < 2.50:1.0 | | | 2.00% | | | | 1.00% | | | | 0.30% | |
≥ 2.50:1.0 | | | | | 2.25% | | | | 1.25% | | | | 0.35% | |
The terms of the Credit Facility contain certain covenants and conditions including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and a minimum liquidity requirement. FutureFuel was in compliance with such covenants as of September 30, 2017.
There were no borrowings under this credit agreement at September 30, 2017 or December 31, 2016.
7)
| PROVISION/(BENEFIT) FOR INCOME TAXES
|
The following table summarizes the provision/(benefit) for income taxes.
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Provision/(benefit) for income taxes | | $ | 1,730 | | | $ | (3,868 | ) | | $ | 3,375 | | | $ | (12,657 | ) |
Effective tax rate | | | 34.2 | % | | | (43.0% | ) | | | 30.9 | % | | | (50.6% | ) |
The effective tax rate for the three months 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, reflects the elimination of certain tax credits and incentives which expired December 31, 2016 and were not in effect for 2017.
7
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
The effective tax rate for the three and nine months ended September 30, 2016, reflects our expected tax rate on reported operating earnings before income tax. Our effective tax rate in the three and nine months ended September 30, 2016, reflects the positive effect of the reinstatement of certain tax credits and incentives for 2016. In 2016, these tax credits and incentives formed a large proportion of FutureFuel’s net income. This increase in proportion combined with the income tax treatment of the credits and incentives reduced FutureFuel’s effective income tax rate in 2016. In addition, during the second quarter of 2016, FutureFuel booked a tax benefit related to the reversal of a state’s treatment of the taxability of the tax credits and incentives.
Unrecognized tax benefits totaled $2,052 and $2,056 at September 30, 2017 and December 31, 2016, respectively.
FutureFuel records interest and penalties, net, as a component of income tax expense. At September 30, 2017 and December 31, 2016, FutureFuel recorded $248 and $193, respectively, in accruals for interest or tax penalties.
We compute earnings per share using the two-class method in accordance with ASC Topic No. 260, “Earnings per Share.” The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding non-vested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at September 30, 2017 or 2016.
Contingently issuable shares associated with outstanding service-based restricted stock units were not included in the earnings per share calculations for the three-month and nine-month periods ended September 30, 2017 or 2016 as the vesting conditions had not been satisfied.
Basic and diluted earnings per common share were computed as follows:
| | | For the three months ended September 30, | | | For the Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Numerator: | | | | | | | | | | | | | | | | |
Net income | | $ | 3,334 | | | $ | 12,868 | | | $ | 7,564 | | | $ | 37,661 | |
Less: distributed earnings allocated to non-vested stock | | | - | | | | (8 | ) | | | - | | | | (32 | ) |
Less: undistributed earnings allocated to non-vested restricted stock | | | (3 | ) | | | (35 | ) | | | (15 | ) | | | (131 | ) |
Numerator for basic earnings per share | | $ | 3,331 | | | $ | 12,825 | | | $ | 7,549 | | | $ | 37,498 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Add: undistributed earnings allocated to non-vested restricted stock | | | 3 | | | | 35 | | | | 15 | | | | 131 | |
Less: undistributed earnings reallocated to non-vested restricted stock | | | (3 | ) | | | (35 | ) | | | (15 | ) | | | (131 | ) |
Numerator for diluted earnings per share | | $ | 3,331 | | | $ | 12,825 | | | $ | 7,549 | | | $ | 37,498 | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average shares outstanding – basic | | | 43,705,234 | | | | 43,570,734 | | | | 43,662,672 | | | | 43,524,729 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Stock options and other awards | | | 9,519 | | | | 2,263 | | | | 8,748 | | | | 4,694 | |
Weighted average shares outstanding – diluted | | | 43,714,753 | �� | | | 43,572,997 | | | | 43,671,420 | | | | 43,529,423 | |
| | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.08 | | | $ | 0.29 | | | $ | 0.17 | | | $ | 0.86 | |
Diluted earnings per share | | $ | 0.08 | | | $ | 0.29 | | | $ | 0.17 | | | $ | 0.86 | |
8
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
Certain options to purchase FutureFuel’s common stock were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2017 and 2016 because they were anti-dilutive in the periods. The weighted average number of options excluded on this basis was 0 and 10,000 for the three and nine-months ended September 30, 2017, respectively. The weighted average number of options excluded on this basis was 30,000 and 76,667 for the three-months and nine-months ended September 30, 2016, respectively.
FutureFuel has two reportable segments organized along similar product groups – chemicals and biofuels.
Chemicals
FutureFuel’s chemicals segment manufactures diversified chemical products that are sold externally to third party customers. This segment is comprised of two components: “custom manufacturing” (manufacturing chemicals for specific customers) and “performance chemicals” (multi-customer specialty chemicals).
Biofuels
FutureFuel’s biofuels business segment primarily manufactures and markets biodiesel. Biodiesel revenues are generated through the sale of biodiesel to customers through FutureFuel’s distribution network at the Batesville Plant, through distribution facilities available at leased oil storage facilities, and through a network of remotely located tanks. Biofuels revenues also include the sale of biodiesel blends with petrodiesel, petrodiesel with no biodiesel added, internally generated, separated RINs, biodiesel production byproducts, and the purchase and sale of other petroleum products on common carrier pipelines. Biodiesel selling prices and profitability can at times fluctuate based on the timing of unsold, internally generated RINs. FutureFuel does not allocate production costs to internally generated RINs, and, from time to time, can enter into sales of biodiesel on a “RINs-free” basis. Such method of selling results in FutureFuel maintaining possession of the applicable RINs from the sale. The benefit derived from the eventual sale of the RINs is not reflected in results of operations until such time as the RIN sale has been completed, which may lead to variability in reported operating results.
Summaryof long-livedassetsandrevenuesbygeographic area
All of FutureFuel’s long-lived assets are located in the United States.
Most of FutureFuel’s sales are transacted with title passing at the time of shipment from the Batesville Plant, although some sales are transacted with title passing at the delivery point. While many of FutureFuel’s chemicals are utilized to manufacture products that are shipped, further processed, and/or consumed throughout the world, the chemical products, with limited exceptions, generally leave the United States only after ownership has transferred from FutureFuel to the customer. FutureFuel is rarely the exporter of record, never the importer of record into foreign countries, and is not always aware of the exact quantities of its products that are moved into foreign markets by its customers. FutureFuel does track the addresses of its customers for invoicing purposes and uses this address to determine whether a particular sale is within or outside the United States. FutureFuel’s revenues attributable to the United States and foreign countries (based upon the billing addresses of its customers) were as follows:
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
United States | | $ | 76,711 | | | $ | 68,462 | | | $ | 197,044 | | | $ | 181,677 | |
All Foreign Countries | | | 895 | | | | 844 | | | | 2,721 | | | | 2,143 | |
Total | | $ | 77,606 | | | $ | 69,306 | | | $ | 199,765 | | | $ | 183,820 | |
Revenues from a single foreign country during the three and nine-months ended September 30, 2017 and 2016 did not exceed 1% of total revenues.
9
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
Summary ofbusinessbysegment
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Revenue | | | | | | | | | | | | | | | | |
Custom chemicals | | $ | 23,593 | | | $ | 20,455 | | | $ | 65,189 | | | $ | 60,148 | |
Performance chemicals | | | 4,574 | | | | 3,844 | | | | 12,686 | | | | 13,782 | |
Chemicals revenue | | | 28,167 | | | | 24,299 | | | | 77,875 | | | | 73,930 | |
Biofuels revenue | | | 49,439 | | | | 45,007 | | | | 121,890 | | | | 109,890 | |
Total Revenue | | $ | 77,606 | | | $ | 69,306 | | | $ | 199,765 | | | $ | 183,820 | |
| | | | | | | | | | | | | | | | | |
Segment gross profit | | | | | | | | | | | | | | | | |
Chemicals | | $ | 8,060 | | | $ | 7,853 | | | $ | 20,401 | | | $ | 22,722 | |
Biofuels | | | (2,534 | ) | | | 2,466 | | | | (6,947 | ) | | | 6,622 | |
Total gross profit | | | 5,526 | | | | 10,319 | | | | 13,454 | | | | 29,344 | |
Corporate expenses | | | (2,326 | ) | | | (2,478 | ) | | | (7,405 | ) | | | (7,598 | ) |
Income/(loss) before interest and taxes | | | 3,200 | | | | 7,841 | | | | 6,049 | | | | 21,746 | |
Interest and other income | | | 1,965 | | | | 1,637 | | | | 5,679 | | | | 4,446 | |
Interest and other expense | | | (101 | ) | | | (478 | ) | | | (789 | ) | | | (1,188 | ) |
(Provision)/benefit for income taxes | | | (1,730 | ) | | | 3,868 | | | | (3,375 | ) | | | 12,657 | |
Net income | | $ | 3,334 | | | $ | 12,868 | | | $ | 7,564 | | | $ | 37,661 | |
Depreciation is allocated to segment costs of goods sold based on plant usage. The total assets and capital expenditures of FutureFuel have not been allocated to individual segments as large portions of these assets are shared to varying degrees by each segment, causing such an allocation to be of little value.
10)
| FAIR VALUE MEASUREMENTS |
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Fair value accounting pronouncements also include a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of FutureFuel. Unobservable inputs are inputs that reflect FutureFuel’sFutureFuel’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
10
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
The following tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis, at September 30, 2017 2020 and December 31, 2016.2019.
| | | Asset (Liability) | | | Asset (Liability) | |
| | | | | | | Fair Value Measurements Using | | | | | | | Fair Value Measurements Using | |
| | | Fair Value at | | | Inputs Considered as: | | | Fair Value at | | | Inputs Considered as: | |
Description | | September 30, 2017 | | | Level 1 | | | Level 2 | | | Level 3 | | | September 30, 2020 | | | Level 1 | | | Level 2 | | | Level 3 | |
Derivative instruments | | $ | (198 | ) | | $ | (198 | ) | | $ | - | | | $ | - | | | $ | 490 | | | $ | 490 | | | $ | 0 | | | $ | 0 | |
Preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments | | $ | 123,588 | | | $ | 123,588 | | | $ | - | | | $ | - | | |
| | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Asset (Liability) | | |
| | | | | | | Fair Value Measurements Using | | |
| | | Fair Value at | | | Inputs Considered as: | | |
Description | | December 31, 2016 | | | Level 1 | | | Level 2 | | | Level 3 | | |
Derivative instruments | | $ | (258 | ) | | $ | (258 | ) | | $ | - | | | $ | - | | |
Preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments | | $ | 106,146 | | | $ | 106,146 | | | $ | - | | | $ | - | | |
Preferred stock and other equity instruments | | | $ | 59,640 | | | $ | 59,640 | | | $ | 0 | | | $ | 0 | |
Trust preferred stock and exchange-traded debt instruments | | | $ | 3,836 | | | $ | 3,836 | | | $ | 0 | | | $ | 0 | |
| | | Asset (Liability) | |
| | | | | | | Fair Value Measurements Using | |
| | | Fair Value at | | | Inputs Considered as: | |
Description | | December 31, 2019 | | | Level 1 | | | Level 2 | | | Level 3 | |
Derivative instruments | | $ | (267 | ) | | $ | (267 | ) | | $ | 0 | | | $ | 0 | |
Preferred stock and other equity instruments | | $ | 68,141 | | | $ | 68,141 | | | $ | 0 | | | $ | 0 | |
Trust preferred stock and exchange-traded debt instruments | | $ | 5,479 | | | $ | 5,479 | | | $ | 0 | | | $ | 0 | |
In April of 2015, FutureFuel acquired additional historical line space 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 which it is expected to contribute to cash flows. The carrying value of the asset was $1,408 at September 30, 2020 and December 31, 2019. FutureFuel tests the intangible asset for impairment in accordance with Topic 350,Intangibles-Goodwill and Other.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
119 )
| ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consisted of the following at:
| | | September 30, 2020 | | | December 31, 2019 | |
Accrued employee liabilities | | $ | 4,420 | | | $ | 2,534 | |
Accrued property, franchise, motor fuel and other taxes | | | 1,545 | | | | 1,226 | |
Lease liability, current | | | 541 | | | | 537 | |
Other | | | 380 | | | | 113 | |
Total | | $ | 6,886 | | | $ | 4,410 | |
On March 30, 2020, FutureFuel, with FutureFuel Chemical as the borrower and certain of FutureFuel’s other subsidiaries as guarantors, amended and restated its credit agreement (the “Credit Agreement”) originally entered into on April 16, 2015 (as amended, the “Prior Credit Agreement”) with the lenders party, Regions Bank as administrative agent and collateral agent, and PNC Bank, N.A., as syndication agent. The Credit Agreement consists of a five-year revolving credit facility in a dollar amount of up to $100,000, which includes a sublimit of $30,000 for letters of credit and $15,000 for swingline loans (collectively, the “Credit Facility”). The Credit Facility expires on March 30, 2025. The primary amendments from the Prior Credit Agreement were a reduction in the facility by $65,000, a reduction in the facility’s applicable interest rate by 0.25%, a reduction in the commitment fee, and elimination of the minimum consolidated fixed charge coverage ratio.
The interest rate floats at the following margins over LIBOR or base rate based upon the leverage ratio from time to time:
Consolidated Leverage Ratio | | Adjusted LIBOR Rate Loans and Letter of Credit Fee | | | Base Rate Loans | | | Commitment Fee | |
< 1.00:1.0 | | | | | 1.00 | % | | | 0.00 | % | | | 0.15 | % |
≥ 1.00:1.0 | And | < 1.50:1.0 | | | 1.25 | % | | | 0.25 | % | | | 0.15 | % |
≥ 1.50:1.0 | And | < 2.00:1.0 | | | 1.50 | % | | | 0.50 | % | | | 0.20 | % |
≥ 2.00:1.0 | And | < 2.50:1.0 | | | 1.75 | % | | �� | 0.75 | % | | | 0.20 | % |
≥ 2.50:1.0 | | | 2.00 | % | | | 1.00 | % | | | 0.25 | % |
The terms of the Credit Facility contain certain negative covenants and conditions including a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio.
There were 0 borrowings under the Credit Agreement at September 30, 2020 or under the Prior Credit Agreement at December 31, 2019.
On 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 repaid the full amount of the PPP loan on May 5, 2020.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
The following table summarizes the income tax provision.
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Income tax (benefit) provision | | $ | (830 | ) | | $ | 1,014 | | | $ | (18,931 | ) | | $ | 2,889 | |
Effective tax rate | | | (13.7 | %) | | | 13.3 | % | | | (85.4 | %) | | | 15.5 | % |
The effective tax rate for the three and nine months ended September 30, 2020 reflects the positive effect of the reinstatement of certain tax credits and incentives for 2020, the most significant of which were the BTC and Small Agri-biodiesel Producer Tax Credit. The BTC and Small Producer Agri-biodiesel Producer Credit were 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 Losses (“NOLs”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 shall be treated as a carryback to each 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 and nine months ended September 30, 2020 as FutureFuel will be able to carry back its 2019 and 2020 federal NOLs to years with a higher tax rate rather than forward to years with a lower tax rate.
The effective tax rate for the three and nine months ended September 30, 2019 reflects the unfavorable effect of the BTC and Small Producer Agri-biodiesel Producer Credit not being in the law for the firstnine months of 2019. The nine months ended September 30, 2019 rate was also favorably impacted from a retroactive research and development credit for 2018 in a state where FutureFuel does significant business.
There were no unrecognized tax benefits at September 30, 2020 or December 31, 2019.
FutureFuel recorded interest and penalties, net, as a component of income tax provision and had accrued balances of $15 and ($557) at September 30, 2020 and December 31, 2019, respectively.
In the three and nine months ended September 30, 2020 and 2019, FutureFuel used the treasury method in computing earnings per share.
Basic and diluted earnings per common share were computed as follows:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Numerator: | | | | | | | | | | | | | | | | |
Net income | | $ | 6,890 | | | $ | 6,622 | | | $ | 41,092 | | | $ | 15,808 | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average shares outstanding – basic | | | 43,743,243 | | | | 43,743,243 | | | | 43,743,243 | | | | 43,743,243 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Stock options and other awards | | | 2,096 | | | | 0 | | | | 864 | | | | 1,910 | |
Weighted average shares outstanding – diluted | | | 43,745,339 | | | | 43,743,243 | | | | 43,744,107 | | | | 43,745,153 | |
| | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.16 | | | $ | 0.15 | | | $ | 0.94 | | | $ | 0.36 | |
Diluted earnings per share | | $ | 0.16 | | | $ | 0.15 | | | $ | 0.94 | | | $ | 0.36 | |
For the three and nine months ended September 30, 2020, 40,000 and 54,667 options were excluded on a weighted average basis respectively, as these options were anti-dilutive in the computation of diluted earnings per share. For the three and nine months ended September 30, 2019, 50,000 and 30,000 options were excluded on a weighted average basis, respectively.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
13) | RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME:INCOME |
The following tables summarize changes in accumulated other comprehensive income from unrealized gains and losses on available-for-sale debt securities in the three and nine months ended September 30, 2017 2020 and 2016. 2019.
| Changes in Accumulated Other Comprehensive Income From Unrealized | |
Gains and Losses on Available-for-Sale Securities | |
For the three months ended September 30, 2017 and 2016 | |
(net of tax) | |
| | | 2017 | | | 2016 | |
Balance at July 1 | | $ | 7,499 | | | $ | 3,372 | |
Other comprehensive income before reclassifications | | | 670 | | | | 672 | |
Amounts reclassified from accumulated other comprehensive income | | | (17 | ) | | | 210 | |
Net current-period other comprehensive income | | | 653 | | | | 882 | |
Balance at September 30 | | $ | 8,152 | | | $ | 4,254 | |
| | | | | | | | | |
| | | | | | | | | |
Changes in Accumulated Other Comprehensive Income From Unrealized | |
Gains and Losses on Available-for-Sale Securities | |
For the nine months ended September 30, 2017 and 2016 | |
(net of tax) | |
| | | 2017 | | | 2016 | |
Balance at January 1 | | $ | 3,540 | | | $ | 2,055 | |
Other comprehensive income before reclassifications | | | 4,259 | | | | 1,727 | |
Amounts reclassified from accumulated other comprehensive income | | | 353 | | | | 472 | |
Net current-period other comprehensive income | | | 4,612 | | | | 2,199 | |
Balance at September 30 | | $ | 8,152 | | | $ | 4,254 | |
Changes in Accumulated Other Comprehensive Income From Unrealized |
Gains and Losses on Available-for-Sale Securities |
Three Months Ended September 30, 2020 and 2019 |
(net of tax) |
| | | 2020 | | | 2019 | |
Balance at July 1 | | $ | 133 | | | $ | 199 | |
Other comprehensive income before reclassifications | | | 60 | | | | 1 | |
Amounts reclassified from accumulated other comprehensive income | | | (67 | ) | | | 0 | |
Net current-period other comprehensive (loss) income | | | (7 | ) | | | 1 | |
Balance at September 30 | | $ | 126 | | | $ | 200 | |
Changes in Accumulated Other Comprehensive Income From Unrealized |
Gains and Losses on Available-for-Sale Securities |
Nine Months Ended September 30, 2020 and 2019 |
(net of tax) |
11
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
| | | 2020 | | | 2019 | |
Balance at January 1 | | $ | 296 | | | $ | (20 | ) |
Other comprehensive income before reclassifications | | | (71 | ) | | | 220 | |
Amounts reclassified from accumulated other comprehensive income | | | (99 | ) | | | 0 | |
Net current-period other comprehensive (loss) income | | | (170 | ) | | | 220 | |
Balance at September 30 | | $ | 126 | | | $ | 200 | |
The following tables summarize amounts reclassified from accumulated other comprehensive income in the three and nine months ended September 30, 2017 2020 and 2016:
Reclassifications from Accumulated Other |
Comprehensive Income for the three and nine months ended |
September 30, 2017 and 2016 |
| | | | | | | | | | |
| | | Three months ended September 30, | | |
| | | 2017 | | | 2016 | | Affected Line Item in Statement of Operations |
Unrealized gains/(losses) on available-for-sale securities | | $ | 26 | | | $ | (322 | ) | Gain/(loss) on marketable securities |
Total before tax | | | 26 | | | | (322 | ) | |
Tax (provision)/benefit | | | (9 | ) | | | 112 | | |
Total reclassifications | | $ | 17 | | | $ | (210 | ) | |
| | | | | | | | | | |
| | | Nine months ended September 30, | | |
| | | 2017 | | | 2016 | | Affected Line Item in Statement of Operations |
Unrealized losses on available-for-sale securities | | $ | (543 | ) | | $ | (727 | ) | Loss on marketable securities |
Total before tax | | | (543 | ) | | | (727 | ) | |
Tax benefit | | | 190 | | | | 255 | | |
Total reclassifications | | $ | (353 | ) | | $ | (472 | ) | |
2019.
Reclassifications from Accumulated Other |
Comprehensive Income for the Three and Nine Months Ended |
12September 30, 2020 and 2019
|
| | | Three Months Ended September 30, | | |
| | | 2020 | | | 2019 | | Affected Line Item in Statement of Operations |
Unrealized gains on available-for-sale debt securities | | $ | 85 | | | $ | 0 | | Gain (loss) on marketable securities |
Total before tax | | | 85 | | | | 0 | | |
Tax effect | | | (18 | ) | | | 0 | | |
Total reclassifications | | $ | 67 | | | $ | 0 | | |
| | | Nine Months Ended September 30, | | |
| | | 2020 | | | 2019 | | Affected Line Item in Statement of Operations |
Unrealized gains on available-for-sale debt securities | | $ | 125 | | | $ | 0 | | Gain (loss) on marketable securities |
Total before tax | | | 125 | | | | 0 | | |
Tax effect | | | (26 | ) | | | 0 | | |
Total reclassifications | | $ | 99 | | | $ | 0 | | |
There were 0 reclassifications from accumulated other comprehensive income in the three and nine months ended September 30, 2019.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
From time to time, FutureFuel and its operations are parties to, or targets of, lawsuits, claims, investigations, regulatory matters, and proceedings, which are being handled and defended in the ordinary course of business. While FutureFuel is unable to predict the outcomes of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.
13)
| RELATED PARTY TRANSACTIONS |
FutureFuel enters into transactions with companies affiliated with or controlled by a director and significant shareholder. Revenues, expenses, prepaid amounts, and unpaid amounts related to these transactions are captured in the accompanying consolidated financial statements as related party line items.
Related party revenues are the result of sales of biodiesel, petrodiesel, blends, other petroleum products, and other similar or related products to these related parties.
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.
12FutureFuel has two reportable segments organized along similar product groups – chemicals and biofuels.
Chemicals
FutureFuel’s chemicals segment manufactures diversified chemical products that are sold externally to third party customers. This segment is composed of two components: “custom manufacturing” (manufacturing chemicals for specific customers) and “performance chemicals” (multi-customer specialty chemicals).
Biofuels
FutureFuel’s biofuels segment primarily manufactures and markets biodiesel. Biodiesel revenues are generated through the sale of biodiesel to customers through FutureFuel’s distribution network at the Batesville Plant, through distribution facilities available at leased oil storage facilities, and through a network of remotely located tanks. Biofuels revenues also include the sale of biodiesel blends with petrodiesel; the sale of petrodiesel with no biodiesel added; the sale of internally generated, separated Renewable Identification Numbers (“RINs”); the sale of biodiesel production byproducts; and the purchase and sale of other petroleum products on common carrier pipelines. Biodiesel selling prices and profitability can at times fluctuate based on the timing of unsold, internally generated RINs. FutureFuel does not allocate production costs to internally generated RINs, and, from time to time, can enter into sales of biodiesel on a “RINs-free” basis, resulting in FutureFuel maintaining possession of the applicable RINs from the sale. The benefit derived from the eventual sale of the RINs is not reflected in results of operations until such time as the RINs sale has been completed, which may lead to variability in reported operating results.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
Summary ofbusinessbysegment
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Revenue | | | | | | | | | | | | | | | | |
Custom chemicals | | $ | 10,328 | | | $ | 25,270 | | | $ | 52,129 | | | $ | 70,935 | |
Performance chemicals | | | 2,409 | | | | 3,376 | | | | 11,139 | | | | 10,922 | |
Chemicals revenue | | | 12,737 | | | | 28,646 | | | | 63,268 | | | | 81,857 | |
Biofuels revenue | | | 41,401 | | | | 37,038 | | | | 91,374 | | | | 103,192 | |
Total Revenue | | $ | 54,138 | | | $ | 65,684 | | | $ | 154,642 | | | $ | 185,049 | |
| | | | | | | | | | | | | | | | | |
Segment gross profit/(loss) | | | | | | | | | | | | | | | | |
Chemicals | | $ | 4,754 | | | $ | 8,488 | | | $ | 20,345 | | | $ | 22,978 | |
Biofuels | | | 1,692 | | | | (3,026 | ) | | | 3,411 | | | | (10,984 | ) |
Total gross profit | | $ | 6,446 | | | $ | 5,462 | | | $ | 23,756 | | | $ | 11,994 | |
Depreciation is allocated to segment cost of goods sold based on plant usage. The total assets and capital expenditures of FutureFuel have not been allocated to individual segments as large portions of these assets are shared to varying degrees by each segment, causing such an allocation to be of little value.
1416)
| SPECIAL CASH DIVIDEND |
On March 23, 2020, the Company declared a special cash dividend of $3.00 per share on common stock in the amount of $131,230 that was paid on April 17, 2020.
17) | INTANGIBLE ASSETRECENTLY ISSUED ACCOUNTING STANDARDS
|
Recently Adopted Accounting Standards
In Aprilthe first quarter of 2015, FutureFuel acquired additional historical line space2020, the Company adopted ASU 2016-13,Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and the associated ASUs (collectively “Topic 326”) on a pipelinemodified retrospective approach. The amendments replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company recorded a $12 reduction to opening retained earnings and an allowance for $1,408.bad debt of $12 on our consolidated financial statements.
Recently Issued Accounting Standards Not Adopted
In December 2019, the FASB issued ASU 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The acquired line space was recorded as an intangible assetamendments simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, "Income Taxes" and improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with an indefinite life as there was no foreseeable limitthe amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the time period over which itspecific amendment. The Company is expected to contribute to cash flows. The carrying valuecurrently evaluating the impact 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.adopting this guidance.
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
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
Other
ASU 2020-04,Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Effective March 12, 2020, the guidance in the update is in response to concerns about structural risks of interbank offered rates (IBORs), and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR). Regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. This guidance will ease the accounting burden associated with transitioning away from reference rates that are expected to be discontinued within our credit facility as described in Note 10.
From time to time, FutureFuel and its operations are parties to, or targets of, lawsuits, claims, investigations, regulatory matters, and proceedings, which are being handled and defended in the ordinary course of business. While FutureFuel is unable to predict the outcomes of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.
During the nine months ended September 30, 2020, the Company reached a legal resolution of a prior year contractual matter for which an accrual of $8,350 was relieved as other income.
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 companyCompany is managed and reported in two reporting segments: chemicals segment and biofuels segment.biofuels. Within the chemicals 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 chemical 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 companyCompany in the ability to utilize resources and is committed to growing each segment.
Coronavirus Disease 2019 (“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 remain unknown. Our priority remains 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 continue to closely monitor 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 principle area we continue to anticipate COVID-19 to negatively impact our financial performance is our customer demand.
Customer Demand – Several of our major chemical customers sell the products we produce for them in 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 chemicals 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 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.
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, | | | Three Months Ended September 30, | |
| | | | | | | | | | | Dollar | | | % | | | | | | | | | | | Dollar | | % | |
| | | 2017 | | | 2016 | | | Change | | | Change | | | 2020 | | | 2019 | | | Change | | | Change | |
Revenues | | $ | 77,606 | | | $ | 69,306 | | | $ | 8,300 | | | | 12.0% | | |
Revenue | | | $ | 54,138 | | | $ | 65,684 | | | $ | (11,546 | ) | | (17.6 | %) |
Income from operations | | $ | 3,200 | | | $ | 7,841 | | | $ | (4,641 | ) | | | (59.2% | ) | | $ | 3,804 | | | $ | 3,275 | | | $ | 529 | | | 16.2 | % |
Net income | | $ | 3,334 | | | $ | 12,868 | | | $ | (9,534 | ) | | | (74.1% | ) | | $ | 6,890 | | | $ | 6,622 | | | $ | 268 | | | 4.0 | % |
Earnings per common share: | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.08 | | | $ | 0.29 | | | $ | (0.21 | ) | | | (72.4% | ) | | $ | 0.16 | | | $ | 0.15 | | | $ | 0.01 | | | 6.7 | % |
Diluted | | $ | 0.08 | | | $ | 0.29 | | | $ | (0.21 | ) | | | (72.4% | ) | | $ | 0.16 | | | $ | 0.15 | | | $ | 0.01 | | | 6.7 | % |
Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | | $ | 856 | | | $ | 853 | | | $ | 3 | | | | 0.4% | | |
Capital expenditures (net of customer reimbursements) | | | $ | 758 | | | $ | 572 | | | $ | 186 | | | 32.5 | % |
Adjusted EBITDA | | $ | 9,553 | | | $ | 10,117 | | | $ | (564 | ) | | | (5.6% | ) | | $ | 5,575 | | | $ | 6,834 | | | $ | (1,259 | ) | | (18.4 | %) |
| | | | | | | | | | | | | | | | | | |
| | | 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
| | | Nine Months Ended September 30, | |
| | | | | | | | | | | Dollar | | | % | |
| | | 2020 | | | 2019 | | | Change | | | Change | |
Revenue | | $ | 154,642 | | | $ | 185,049 | | | $ | (30,407 | ) | | | (16.4 | %) |
Income from operations | | $ | 16,644 | | | $ | 5,671 | | | $ | 10,973 | | | | 193.5 | % |
Net income | | $ | 41,092 | | | $ | 15,808 | | | $ | 25,284 | | | | 159.9 | % |
Earnings per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.94 | | | $ | 0.36 | | | $ | 0.58 | | | | 161.1 | % |
Diluted | | $ | 0.94 | | | $ | 0.36 | | | $ | 0.58 | | | | 161.1 | % |
Capital expenditures (net of customer reimbursements) | | $ | 1,891 | | | $ | 1,446 | | | $ | 445 | | | | 30.8 | % |
Adjusted EBITDA | | $ | 18,404 | | | $ | 15,633 | | | $ | 2,771 | | | | 17.7 | % |
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 September 30, | | | Nine Months Ended September 30, | |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Net income | | $ | 6,890 | | | $ | 6,622 | | | $ | 41,092 | | | $ | 15,808 | |
Depreciation | | | 2,692 | | | | 3,620 | | | | 8,554 | | | | 9,092 | |
Non-cash stock-based compensation | | | - | | | | 21 | | | | 49 | | | | 21 | |
Interest and dividend income | | | (1,076 | ) | | | (2,718 | ) | | | (4,562 | ) | | | (7,830 | ) |
Non-cash interest expense and amortization of deferred financing costs | | | 32 | | | | 43 | | | | 119 | | | | 130 | |
Gain on disposal of property and equipment | | | (53 | ) | | | (22 | ) | | | (51 | ) | | | (11 | ) |
(Gain) loss on derivative instruments | | | (867 | ) | | | (322 | ) | | | (6,789 | ) | | | 711 | |
(Gain) loss on marketable securities | | | (1,213 | ) | | | (1,424 | ) | | | 7,273 | | | | (5,177 | ) |
Other non-operating income | | | - | | | | - | | | | (8,350 | ) | | | - | |
Income tax (benefit) provision | | | (830 | ) | | | 1,014 | | | | (18,931 | ) | | | 2,889 | |
Adjusted EBITDA | | $ | 5,575 | | | $ | 6,834 | | | $ | 18,404 | | | $ | 15,633 | |
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, | |
| | | 2017 | | | 2016 | |
Adjusted EBITDA | | $ | 17,201 | | | $ | 36,328 | |
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 | |
| | | Nine Months Ended September 30, | |
| | | 2020 | | | 2019 | |
Net cash provided by operating activities | | $ | 76,576 | | | $ | 24,358 | |
Deferred income taxes, net | | | 951 | | | | 273 | |
Interest and dividend income | | | (4,562 | ) | | | (7,830 | ) |
Income tax (benefit) provision | | | (18,931 | ) | | | 2,889 | |
(Gain) loss on derivative instruments | | | (6,789 | ) | | | 711 | |
Change in fair value of derivative instruments | | | 757 | | | | 357 | |
Change in operating assets and liabilities, net | | | (21,248 | ) | | | (5,125 | ) |
Other income non-operating income | | | (8,350 | ) | | | - | |
Adjusted EBITDA | | $ | 18,404 | | | $ | 15,633 | |
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 September 30, | | | Nine Months Ended September 30, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2020 | | | 2019 | | | Amount | | | % | | | 2020 | | | 2019 | | | Amount | | | % | |
Revenues | | $ | 54,138 | | | $ | 65,684 | | | $ | (11,546 | ) | | | (17.6 | %) | | $ | 154,642 | | | $ | 185,049 | | | $ | (30,407 | ) | | | (16.4 | %) |
Volume/product mix effect | | | | | | | | | | $ | 5,369 | | | | 8.2 | % | | | | | | | | | | $ | 11,151 | | | | 6.0 | % |
Price effect | | | | | | | | | | $ | (16,915 | ) | | | (25.8 | %) | | | | | | | | | | $ | (41,558 | ) | | | (22.5 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 6,446 | | | $ | 5,462 | | | $ | 984 | | | | 18.0 | % | | $ | 23,756 | | | $ | 11,994 | | | $ | 11,762 | | | | 98.1 | % |
Consolidated sales revenue in the three and nine months ended September 30, 2017 increased $8,3002020, decreased $11,546 and $15,945, respectively,$30,407, compared to the three and nine months ended September 30, 2016.2019. This increasedecrease primarily resulted from higher prices in the biofuel segment and increasedlower sales volumes in the chemical segment. Inchemicals segment and lower biofuel selling prices driven by the nine-month comparison period,COVID-19 pandemic along with the increase from higher pricesabsence of an agrochemical product we no longer make. Partially offsetting this decline in the biofuel segmentthree and nine-month period was partially offset by lowerincreased biofuels sales volumes largely from the expiration of the federal blenders’ tax credit (“BTC”).volumes.
Gross profit in the three and nine months ended September 30, 2017 decreased $4,7932020 increased $984 and $15,890, respectively,$11,762 compared to the three and nine months ended September 30, 2016. In2019. This increase was primarily from: i) the biofuel segment, this decrease largely resulted fromblenders’ tax credit (“BTC”) being in effect for the absencecurrent period and not in effect in the prior year periods; ii) increased sales volumes of biofuels; and iii) the BTC which expired on December 31, 2016. We also experiencedchange in the unrealized and realized activity in derivative instruments. The change in derivatives was a reductiongain of $867 and $322 in pipeline profits forthe three months ended September 30, 2020 and 2019, respectively. The change in derivatives had a greater impact in the nine-month comparison period with a gain of $6,789 in the nine months ended September 30, 2017 as compared to the prior year period.
Another significant impact to the reduction in gross profit2020 and a loss of $711 in the nine months ended September 30, 2017,2019. Mostly reducing this profit was the reduction in chemical sales volumes as compared todescribed above.
Also impacting gross profit in both the prior year period,three and nine months ended September 30, 2020 and 2019 was the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. ThisIn the three months ended September 30, 2020 this adjustment reduceddecreased gross profit $5,329$628 and increased gross profit $557 in the three months ended September 30, 2019. In the nine months ended September 30, 20172020 and 2019, this adjustment 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$2,266 and $2,480, respectively.
OperatingExpenses
Operating expenses increased $455 and $789 in the three and nine months ended September 30, 20162020, as compared to the three months ended September 30, 2019 from higher compensation expense and various external services.
Other Income
During the nine months ended September 30, 2020, the Company reached a legal resolution of a prior year contractual matter for which an accrual of $8,350 was relieved as other income.
Income Tax Provision
The effective tax rate for the three months ended September 30, 2020 reflects the positive effect of the reinstatement of certain tax credits and incentives for 2020, the most significant of which were the BTC and Small Agri-biodiesel Producer Tax Credit. The BTC and Small Producer Agri-biodiesel Producer Credit were 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 Losses (“NOLs”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 shall be treated as a carryback to each 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 and nine months ended September 30, 2020 as FutureFuel will be able to carryback its 2019 and 2020 federal NOLs to years with a higher tax rate rather than forward to years with a lower tax rate.
The effective tax rate for the three months ended September 30, 2019 reflects the unfavorable effect of the BTC and Small Producer Agri-biodiesel Producer Credit not being in the law for the first nine months of 2019. The rate was also favorably impacted from a retroactive research and development credit for a prior year in a state where FutureFuel does significant business.
There were no such adjustment was necessaryunrecognized tax benefits at September 30, 2020 or December 31, 2019.
FutureFuel recorded interest and penalties, net, as a component of income tax provision and had accrued balances of $13 and ($557) at September 30, 2020 and December 31, 2019, respectively.
NetIncome
Net income for the three and nine months ended September 30, 2020 increased $268 and $25,284, respectively, as compared to the same periods in 2019. This increase resulted primarily from biodiesel tax credits and incentives that were in effect in the three and nine months ended September 30, 2017. Please see footnote 2 for additional discussion.
Also contributing to2020 that were not in effect until the reduction in gross profit end of 2019 (see Note 2) and tax law changes in the three months ended September 30, 2017, was the loss in the unrealized and realized activity in derivative instruments of $3,314, as compared to a gain of $803, in the prior year period. The change in the derivative activity in thefirst nine months ending September 30, 2017 favorably impacted gross profit with a loss of $1,511, as compared to a loss of $5,3752020 not in effect for 2019 (see the prior year period.
OperatingExpenses
Operating expenses decreased from $2,478 to $2,326 or $152 inincome tax provision discussion above). In the three months ended September 30, 2017 and from $7,598 to $7,405 or $193 in the nine months ended September 30, 2017,2020, income was also benefited by other income from the resolution of a prior year contractual matter. Partially offsetting this increase in the nine-month period was net unrealized losses on equity securities.
ChemicalsSegment
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2020 | | | 2019 | | | Amount | | | % | | | 2020 | | | 2019 | | | Amount | | | % | |
Revenues | | $ | 12,737 | | | $ | 28,646 | | | $ | (15,909 | ) | | | (55.5 | %) | | $ | 63,268 | | | $ | 81,857 | | | $ | (18,589 | ) | | | (22.7 | %) |
Volume/product mix effect | | | | | | | | | | $ | (15,667 | ) | | | (54.7 | %) | | | | | | | | | | $ | (20,820 | ) | | | (25.4 | %) |
Price effect | | | | | | | | | | $ | (242 | ) | | | (0.8 | %) | | | | | | | | | | $ | 2,231 | | | | 2.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 4,754 | | | $ | 8,488 | | | $ | (3,734 | ) | | | (44.0 | %) | | $ | 20,345 | | | $ | 22,978 | | | $ | (2,633 | ) | | | (11.5 | %) |
Chemical revenue in the three and nine months ended September 30, 2020 decreased $15,909 and $18,589 as compared to the three and nine months ended September 30, 2016, respectively. This reduction in both periods was from lower compensation cost partially offset by higher research and development expense.
Provision/(Benefit)for IncomeTaxes
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, 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 positive effect of the reinstatement of the certain tax credits and incentives for 2016. In addition, during the second quarter of 2016, FutureFuel booked a tax benefit related to the reversal of a state’s treatment of the taxability of the tax credits and incentives.
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Unrecognized tax benefits totaled $2,052 and $2,056 at September 30, 2017 and December 31, 2016, respectively.
NetIncome
Net income for the three and nine months ended September 30, 2017 decreased $9,534 and $30,097, respectively, as compared to the same periods in 2016. The decrease resulted from the lack of the benefit of tax credits and incentives in effect in the three and nine months ended September 30, 2016 which were not in effect in the three and nine months ended September 30, 2017. Additionally, the adjustments in the carrying value of our inventory as determined utilizing 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.
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% | ) |
Sales revenue in the three months ended September 30, 2017 increased by $3,868 compared to the three months ended September 30, 2016. Sales revenue2019. Revenue for our custom chemicals (unique chemicals produced for specific customers) for the three and nine months ended September 30, 20172020 totaled $23,593, an increase$10,328 and $52,129, a decrease of $3,138$14,942 and $18,806 from the comparablesame period in 2016. This increase was primarily attributed to increased sales volumes2019. Decreased revenue in the three and nine months ended September 30 as compared to the prior three and nine-month period were mostly driven by: i) an agrochemical product we no longer manufacture; ii) a slowdown in near-term business in both automotive and energy markets.related applications resulting from COVID-19; and iii) the phase out of a laundry detergent additive. Performance chemicals (comprised(composed of multi-customer products which are sold based on specification) sales revenues were $4,574revenue was $2,409 and $11,139 in the three months ended September 30, 2017, an increase of $730 from the three months ended September 30, 2016. 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 to2020, a decrease of $967 from the same three months in 2019 and an increase of $217 from the same nine months ended September 30, 2016. This increase was primarily attributed to increased sales volumein 2019. The decrease 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 monththree-month comparison period ended September 30, 2017. This decrease was primarily from reduced sales volumesvolume from COVID-19. In the nine-month comparison period, revenue was benefited from higher glycerin prices based on the reduced supply of imported material as a polymer modifier product. result of COVID-19.
Gross profit for the chemicals segment for the three months ended September 30, 2017 increased by $207 when compared to the three months ended September 30, 2016. Factors positively impacting the three-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 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.
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 impacting2020, decreased $3,734 and $2,633, respectively, when compared to the nine-month comparisonsame periods of gross profit were2019. This decrease was driven primarily from volume effects resulting from COVID-19 and the change in adjustments in the carrying valueabsence 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.an herbicide intermediate product we no longer make.
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Biofuels Segment
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2017 | | | 2016 | | | Amount | | | % | | | 2017 | | | 2016 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 49,439 | | | $ | 45,007 | | | $ | 4,432 | | | 9.8% | | | $ | 121,890 | | | $ | 109,890 | | | $ | 12,000 | | | 10.9% | |
Volume/product mix effect | | | | | | | | | | $ | (6,460 | ) | | (14.4% | ) | | | | | | | | | | $ | (22,807 | ) | | (20.8% | ) |
Price effect | | | | | | | | | | $ | 10,892 | | | 24.2% | | | | | | | | | | | $ | 34,807 | | | 31.7% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | (2,534 | ) | | $ | 2,466 | | | $ | (5,000 | ) | | (202.8% | ) | | $ | (6,947 | ) | | $ | 6,622 | | | $ | (13,569 | ) | | (204.9% | ) |
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2020 | | | 2019 | | | Amount | | | % | | | 2020 | | | 2019 | | | Amount | | | % | |
Revenues | | $ | 41,401 | | | $ | 37,038 | | | $ | 4,363 | | | | 11.8 | % | | $ | 91,374 | | | $ | 103,192 | | | $ | (11,818 | ) | | | (11.5 | %) |
Volume/product mix effect | | | | | | | | | | $ | 21,036 | | | | 56.8 | % | | | | | | | | | | $ | 31,971 | | | | 31.0 | % |
Price effect | | | | | | | | | | $ | (16,673 | ) | | | (45.0 | %) | | | | | | | | | | $ | (43,789 | ) | | | (42.4 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 1,692 | | | $ | (3,026 | ) | | $ | 4,718 | | | | | | | $ | 3,411 | | | $ | (10,984 | ) | | $ | 14,395 | | | | | |
Biofuels sales revenue in the three and nine months ended September 30, 2017 increased $4,432 and $12,000 when compared to the three and nine months ended September 30, 2016. This increase was primarily from higher prices on biodiesel, biodiesel RINs,2020 increased $4,363 and biodiesel blends. The sale of separated, internally generated RINs, comprised a larger component of revenue in the current quarter and nine-month perioddecreased $11,818 as compared to the prior year periods. In addition, pipeline sales increased to $1,852 from $1,509same periods of 2019, respectively. Sales volumes improved in the three months ended September 30, 2017 and 2016, respectively. For the nine-month comparison period, pipeline sales decreased to $1,852periods but were reduced by lower selling prices from $7,390. continued impact of COVID-19.
Revenue from common carrier pipelines varies as itsOne major refiner/blender customer within our biofuels segment was greater than 10% of revenue recognition depends upon whether a transaction is bought fromin 2020 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.
A portion of our biodiesel sold in 2017 was to two major refiners/blenders and one major refiner in 2016.2019. 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 customersthis customer are not under fixed terms and the customers havecustomer has 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 customersthis customer are based upon then-market rates, as would be the case with sales of this commodity to other customers.
Biofuels gross profit was $1,692 in the three and nine months ended September 30, 2017 decreased $5,000 and $13,569 when2020, as compared to a gross loss of $3,026 in the same period of 2019. This increase was primarily from stronger sales volumes with improved margins given the blenders tax credit in effect in the current year and not in effect in 2019. Gross profit also improved from higher gains in derivatives: $867 in the three andmonths ended September 30, 2020 as compared to a gain of $322 in the three months ended September 30, 2019.
Biofuels gross profit was $3,411 in the nine months ended September 30, 2016. Cost of goods sold increased2020, as a result of the absence of the blenders’ tax credit which expired December 31, 2016 and was in effect in the prior year’s period. Gross profits were reduced by the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment decreased gross profit $383 and $4,276 in the three and nine months ended September 30, 2017, respectively, compared to a decreasegross loss of $336 and an increase of $898$10,984 in the three and nine months ended September 30, 2016, respectively.same period of 2019. 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 byincrease was primarily from 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$6,789 in the threenine 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 $1,511,2020 as compared to a loss of $5,375$711 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 valuesame period 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.2019.
FutureFuel recognizesWe recognize 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) | |
| | | September 30, 2020 | | | December 31, 2019 | |
| | | Contract Quantity Short | | | Fair Value | | | Contract Quantity Short | | | Fair Value | |
Regulated fixed price future commitments* | | | 250 | | | $ | 490 | | | | 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. 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, 2017 and 2016 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$7,400 and $6,759$14,417 for the three months ended September 30, 20172020 and 2016, and $12,477 and $17,103 for2019, respectively. For the nine months ended September 30, 20172020 and 2016,2019 bill-and-hold sales revenue was $24,888 and $38,179, respectively. As of September 30,2020, $2,653 of the three- and nine-month bill-and-hold revenue had not shipped.
Liquidity and Capital Resources
Our net cash provided by (used in)from operating activities, investing activities, and financing activities for the nine months ended September 30, 20172020 and 20162019 are set forth in the following chart.table.
| | | Nine months ended September 30, | | | Nine Months Ended September 30, | |
| | | 2017 | | | 2016 | | | 2020 | | | 2019 | |
Net cash provided by operating activities | | $ | 36,440 | | | $ | 76,879 | | | $ | 76,576 | | | $ | 24,358 | |
Net cash used in investing activities | | $ | (14,252 | ) | | $ | (40,444 | ) | |
Net cash (used in) provided by investing activities | | | $ | (156 | ) | | $ | 4,488 | |
Net cash used in financing activities | | $ | (108,215 | ) | | $ | (8,111 | ) | | $ | (139,580 | ) | | $ | (7,873 | ) |
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 cash provided by operating activities increased from $24,358 in the first nine months of 20162019 to $36,440$76,576 of cash provided by operating activities in the first nine months of 2017.2020, for a net increase of $52,218. This decreaseincrease was primarily attributable to the decrease of $30,097 in net income, the decrease in the change in accounts receivable of $13,252 and inventory$77,567. The provision of $8,439 offset bythis cash resulted from the change of $73,041 in accounts receivable for the first nine months of 2020 primarily from BTC receivables, as compared to a $4,526 decrease in accounts receivable for the same period in 2019. Offsetting these net cash inflows was a $57,662 net decrease in the accounts payable, calculated from the decrease of $51,711 in the first nine months of 2020 as compared to an increase in the changesame period in 2019 of $5,951. This cash outflow from accounts payable was also primarily related to BTC rebates due to customers and paid in 2020. The increase in net income also provided $25,284 in the first nine months of $11,278.
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2020 as compared to the same period in 2019.
Investing Activities
Cash used inprovided by investing activities was $14,252decreased from $4,488 of cash provided in the first nine months of 2017 compared2019 to $40,444$156 of cash used in investing activities in the first nine months of 2016. This change2020. The primary source of the increase in cash used was primarily the result of the decrease in the net purchasessales of marketable securities of $7,106. Those net sales amounted to $2,656 in the first nine months ending September 30, 2020. Offsetting this change was a decrease in capital expenditures of 2017 compared to the first nine months of 2016. Such net purchases totaled $10,882 and $33,328, in the first nine months of 2017 and 2016, respectively.$2,422. Our capital expenditures and customer reimbursements for capital expenditures for the nine months ended September 30, 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 | |
| | | 2020 | | | 2019 | |
Cash paid for capital expenditures | | $ | 3,717 | | | $ | 6,139 | |
Cash received from customers as reimbursement of capital expenditures | | $ | (1,826 | ) | | $ | (4,693 | ) |
Cash paid for capital expenditures, net of reimbursements | | $ | 1,891 | | | $ | 1,446 | |
Financing Activities
Cash used in financing activities increased to $108,215was $139,580 and $7,873, in the first nine months of 2017 from $8,111ended September 30, 2020 and 2019, respectively. This $131,707 increase in the first nine months of 2016. This change iscash used was primarily the resultpayment of payments of dividendsa special dividend on our common stock in the first nine months of 2017 compared2020 of $131,230. The remaining increase of $477 related to debt origination costs in the first nine months of 2016. The payment2020 from the amendment of dividends totaled $108,063 and $7,869 in the first nine months of 2017 and 2016, respectively.our existing credit facility.
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.
During the three months ended September 30, 2020, we applied for and received loan proceeds under the Paycheck Protection Program. On May 5, 2020, we repaid the loan in full.
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 quarters of 2017,three and nine months ended September 30, 2020 and 2019, we paid a regular quarterly cash dividenddividends in the amount of $0.06 per share on our common stock. The regular quarterly cash dividend amounted to $2,625 per quarter$2,624 in each of the first second and third quarters of 2017. In the first quarter of 2017,three quarters. On March 23, 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 paid 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 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 endedAt September 30, 20172020 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$63,476 and $106,146$73,620 at September 30, 20172020 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-BalanceOff-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, 20172020 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, 20172020 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 nine 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 biodieselbiofuels 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 ofAt September 30, 20172020 and December 31, 2016,2019, the fair values of our derivative instruments were a net asset of $490 and 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 nine 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 in
thousands(a) | | Units | | Hypothetical
Adverse
Change in
Price | | | Decrease in
Gross
Profit | | | Percentage
Decrease
in Gross
Profit | |
Biodiesel feedstocks | | | 336,217 | | LB | | | 10 | % | | $ | 8,977 | | | | 37.8 | % |
Methanol | | | 57,481 | | LB | | | 10 | % | | $ | 753 | | | | 3.2 | % |
Electricity | | | 78 | | MWH | | | 10 | % | | $ | 414 | | | | 1.7 | % |
Sodium Methylate | | | 9,428 | | LB | | | 10 | % | | $ | 307 | | | | 1.3 | % |
(a) Volume requirements and average price information are based upon volumes used and prices obtained for the nine months ended September 30, 2020. Volume requirements may differ materially from these quantities in future years as our business evolves. |
We had no borrowings as ofat September 30, 20172020 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 ofat September 30, 20172020 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 disease ("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, including but not limited to the COVID-19 pandemic and the response thereto, 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 2020 | |
| |
| | |
By: | /s/ Rose M. Sparks | |
| | |
Rose M. Sparks, Chief Financial Officer | |
and Principal Financial Officer | |
| | |
Date: November 9, 2017 2020 | |
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