Set forth below is a summary of certain consolidated financial information for the periods indicated.
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).
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 | |
| | | 2022 | | | 2021 | | | Amount | | | % | | | 2022 | | | 2021 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 118,141 | | | $ | 98,682 | | | $ | 19,459 | | | | 19.7 | % | | $ | 278,198 | | | $ | 214,316 | | | $ | 63,882 | | | | 29.8 | % |
Volume/product mix effect | | | | | | | | | | | (10,154 | ) | | | (10.3 | %) | | | | | | | | | | | (24,884 | ) | | | (11.6 | %) |
Price effect | | | | | | | | | | | 29,613 | | | | 30.0 | % | | | | | | | | | | | 88,766 | | | | 41.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit (loss) | | | 19,985 | | | | 8,192 | | | | 11,793 | | | | 144.0 | % | | | 13,807 | | | | (2,587 | ) | | | 16,394 | | | | n/a | |
Operating expenses | | | (3,095 | ) | | | (2,050 | ) | | | (1,045 | ) | | | 51 | % | | | (8,039 | ) | | | (6,332 | ) | | | (1,707 | ) | | | 27.0 | % |
Other income (expense) | | | 587 | | | | (121 | ) | | | 708 | | | | n/a | | | | (5,435 | ) | | | 792 | | | | (6,227 | ) | | | n/a | |
Income tax (provision) benefit | | | (1,697 | ) | | | 3,181 | | | | (4,878 | ) | | | n/a | | | | (55 | ) | | | 12,037 | | | | (12,092 | ) | | | n/a | |
Net income | | $ | 15,780 | | | $ | 9,202 | | | $ | 6,578 | | | | 71.5 | % | | $ | 278 | | | $ | 3,910 | | | $ | (3,632 | ) | | | (92.9 | %) |
Consolidated sales revenue in the three and nine months ended September 30, 20172022 increased $8,300$19 and $15,945, respectively,$64 million, compared to the three and nine months ended September 30, 2016. This increase primarily2021, respectively. The increases resulted from higher sales prices in the biofuelbiofuels segment, and to a lesser extent, from increased prices and sales volumes in the chemicalchemicals segment. In the nine-month comparison period, theThis increase from higher prices in the biofuel segment was partially offsetreduced by lower sales volumes largely fromin biofuels for both the expiration of the federal blenders’ tax credit (“BTC”).three-and nine-month periods ending September 30, 2022.
Gross profit in the three and nine months ended September 30, 2017 decreased $4,793 and $15,890, respectively,2022 increased $11.8 million as compared to the three and nine months ended September 30, 2016. In the biofuel segment, this decrease largelysame period of 2021. The increase primarily resulted from improved margins from the absence ofbiofuels segment and to a lesser extent, improved sales volume in the BTC which expired on December 31, 2016. We also experienced a reduction in pipeline profitschemical segment.
Gross profit for the nine months ended September 30, 20172022 increased $16.4 million as compared to the same period of 2021. This increase primarily resulted from: i) improved margins from biofuels, ii) improved margins from the chemical segment from product mix and increased sales volumes, and iii) the prior year period. period included exorbitantly high natural gas prices experienced in the February 2021 from Winter Storm Uri. Mostly offsetting these increases was the change in the activity in derivative instruments with a loss of $21.9 million in the current nine-month period, as compared to $10.4 million in the same period of 2021. We experienced unprecedented volatility in the heating oil futures market which resulted in losses that were not fully recoverable on fuel sold. We have since amended our derivative strategy to help mitigate reoccurrence.
Another significant impact to the reduction inAlso favorably impacting gross profit in the nine monthsthree-month period ended September 30, 2017,2022 as compared to the prior yearsame period of 2021, was the change in 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, 2022 and 2021, this adjustment reducedincreased gross profit $5,329 in$6.1 million and $1.0 million, respectively. In the nine months ended September 30, 20172022 and 2021, this adjustment increased gross profit $1,845 in$1.3 million and decreased gross profit $6.1 million, respectively. The change for the nine months ended September 30, 2016. This change2022 was inclusive of a liquidation of LIFO inventory from our biofuel segment as stated in LIFO resulted in a lower of cost or market adjustment of $1,877note 4 to our consolidated financial statements.
Operating expenses
Operating expenses increased $1.0 million and $1.7 million in the three and nine months ended September 30, 20162022, as compared to the same periods of 2021. This increase was primarily from increased administrative fees and no such adjustmentcompensation expense.
Other income (expense)
Other income (expense) increased pretax profit $0.7 million in the three months ended September 30, 2022 as compared to the prior year period on increased interest and dividends. In the nine-month comparison period for 2022 and 2021, pretax profit decreased $6.2 million. This reduction was necessaryprimarily from unrealized losses on marketable securities. In addition, an impairment charge for an intangible asset reduced other income in the prior year period by $1.4 million.
Income tax benefit
The Company’s effective tax rate for the nine months ended September 30, 2022 reflects the favorable impact of the BTC. This was partly offset by the derecognition of accumulated tax benefits inherent in carryforwards of certain tax attributes, as discussed below.
The Company evaluates its deferred tax assets quarterly and records a valuation allowance to reduce these assets to the amount that is more likely than not to be realized. During the first quarter of 2022, based on all available evidence, the Company determined that portions of its deferred tax assets for carryforwards of federal and state net operating losses, tax credits, and capital losses do not meet the realizability standard of more likely than not. This assessment was modified in the second quarter, when a reduction in the forecasted annual tax loss facilitated the release of some of the valuation allowance established in the first quarter.
ChemicalSegment
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2022 | | | 2021 | | | Amount | | | % | | | 2022 | | | 2021 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 21,506 | | | $ | 16,691 | | | $ | 4,815 | | | | 28.8 | % | | $ | 61,261 | | | $ | 48,348 | | | $ | 12,913 | | | | 26.7 | % |
Volume/product mix effect | | | | | | | | | | $ | 785 | | | | 4.7 | % | | | | | | | | | | $ | 659 | | | | 1.4 | % |
Price effect | | | | | | | | | | $ | 4,030 | | | | 24.1 | % | | | | | | | | | | $ | 12,254 | | | | 25.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 8,362 | | | $ | 5,105 | | | $ | 3,257 | | | | 63.8 | % | | $ | 17,976 | | | $ | 8,089 | | | $ | 9,887 | | | | 122.2 | % |
Chemical revenue in the three and nine months ended September 30, 2017. Please see footnote 2 for additional discussion.
Also contributing to the reduction in gross profit in the three months ended September 30, 2017, was the loss in the unrealized2022 increased $4.8 million 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 the nine months ending September 30, 2017 favorably impacted gross profit with a loss of $1,511, as compared to a loss of $5,375 in the prior year period.
OperatingExpenses
Operating expenses decreased from $2,478 to $2,326 or $152 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, as$12.9 million compared to the three and nine months ended September 30, 2016, respectively. This reduction in both periods was2021. Revenue from lower compensation cost partially offset by higher research and development expense.
Provision/(Benefit)our custom chemicals (unique chemicals produced under contract for IncomeTaxes
The effective tax ratespecific customers) 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, reflects2022 totaled $16.0 million and $44.0 million, an increase of $3.3 and $8.4 from the eliminationthree-and nine-month comparative periods in 2021, respectively. The improvement in the current year periods was primarily from contractual sales prices indexed to raw material prices and general inflation. Performance chemicals (composed of certain tax creditsmulti-customer products which are sold to the open market based on specification) revenue was $5.5 million and incentives$17.3 million, an increase of $1.5 million and $4.5 million as compared to the same periods of 2021, respectively. The increase in the current year periods was from a higher selling price of glycerin partially offset by a weaker market for 2017. our monomer additive.
The effective tax rateGross profit 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 inchemical segment for the three and nine months ended September 30, 2016, reflects2022 increased $3.3 and $9.9 million, respectively, from product mix and, to a lesser extent, from increased sales volumes and 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.
17
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 effectchange 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 adjustmentsadjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting negatively impacted net incomeaccounting. For the nine months ended September 30, 2022, gross profit increased when compared to the same period of 2021 from the absence of the unusually high natural gas price in boththe prior year period.
BiofuelsSegment
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2022 | | | 2021 | | | Amount | | | % | | | 2022 | | | 2021 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 96,635 | | | $ | 81,991 | | | $ | 14,644 | | | | 17.9 | % | | $ | 216,937 | | | $ | 165,968 | | | $ | 50,969 | | | | 30.7 | % |
Volume/product mix effect | | | | | | | | | | $ | (10,939 | ) | | | (13.3 | %) | | | | | | | | | | $ | (25,543 | ) | | | (15.4 | %) |
Price effect | | | | | | | | | | $ | 25,583 | | | | 31.2 | % | | | | | | | | | | $ | 76,512 | | | | 46.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit (loss) | | $ | 11,623 | | | $ | 3,087 | | | $ | 8,536 | | | | 276.5 | % | | $ | (4,169 | ) | | $ | (10,676 | ) | | $ | 6,507 | | | | 60.9 | % |
Biofuels revenue in 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, 20172022 increased by $3,868$14.6 million and $51.0 million as compared to the three months ended September 30, 2016. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months ended September 30, 2017 totaled $23,593, an increasesame periods of $3,138 from the comparable period in 2016. This increase was primarily attributed to increased sales2021, respectively. The biodiesel and biodiesel blend volumes in the agrochemical and energy markets. Performance chemicals (comprised of multi-customer products which are sold based on specification) sales revenues were $4,574 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 $3,945decreased as compared to the nine months ended September 30, 2016. This increase was primarily attributed to increased sales volume in the agrochemical and energy markets, new customer product sales and increased amortization of deferred revenue which were mostly offset by the reduced price and volume of the laundry detergent additive. Performance chemical sales revenue were down $1,096 to $12,686, in the nine month period ended September 30, 2017. This decrease wasprior year periods, primarily from reduced sales volumesthe availability of a polymer modifier product.
Gross profit for the chemicals segment for the three months ended September 30, 2017 increased by $207 wheneconomical feedstock. Offsetting these volume decreases as compared to the three months ended September 30, 2016. Factors positively impactingsame period of 2021, was higher selling prices with the three-month comparison of gross profit were from the change in adjustmentsoverall increase in the carrying valuefuel market.
A significant portion of our inventory as determined utilizing the LIFO method of inventory accounting and volume growthbiodiesel sold was to two major refiner/blender 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 impacting the nine-month comparison of gross profit were from the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting, a decline in the sales volume and price of the laundry detergent additive, and a decline in the sales volume of the polymer modifier product. Positively impacting the nine-month comparison period was the volume growth in the agrochemical and energy markets.
18
BiofuelsSegment
| | | 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% | ) |
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,2022 and biodiesel blends. The sale of separated, internally generated RINs, comprised a larger component of revenue in the current quarter and nine-month period as compared to the prior year periods. In addition, pipeline sales increased to $1,852 from $1,509 in the three months ended September 30, 2017 and 2016, respectively. For the nine-month comparison period, pipeline sales decreased to $1,852 from $7,390.
Revenue from common carrier pipelines varies as its revenue recognition depends upon whether a transaction is bought from and sold to the same party. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another (including buy/sell agreements) are combined and recorded on a net basis. Additionally, revenue from common carrier pipelines fluctuates with market conditions.
A portion of our biodiesel sold in 2017 was to two major refiners/blenders and one major refiner in 2016.2021. No assurances can be given that we will continue to sell to such major refiners, or, if we do sell, the volume we will sell or the profit margin we will realize. We do not believe that the loss of these customersthis customer would have a material adverse effect on our biofuels segment or on us as a whole in that:because: (i) unlike our custom manufacturing products, biodiesel is a commodity with a large potential customer base; (ii) we believe that we could readily sell our biodiesel to other customers as potential demand from other customers for biodiesel exceeds our production capacity; (iii)(ii) our sales to these customers are not under fixed terms and the customers have no fixed obligation to purchase any minimum quantities except as stipulated by short termshort-term purchase orders; and (iv)(iii) the prices we receive from these customers are based upon then-market rates, as would be the case with sales of this commodity to other customers.
Biofuels gross profit was $11.6 million in the three and nine months ended September 30, 2017 decreased $5,000 and $13,569 when compared to the three and nine months ended September 30, 2016. Cost2022, an improvement of goods sold increased as a result$8.5 million compared to the same period 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 by2021 primarily from the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting.accounting as compared to the same period of 2021. This adjustment decreasedincreased gross profit $383 and $4,276this period $5.4 million as compared to an increase in gross profit of $1.1 in the three andsame prior year period. Also increasing gross profits was improved margins.
Gross losses were $4.2 million in the nine months ended September 30, 2017, respectively,2022, a decreased loss of $6.5 million from the same period in 2021. This gross loss included the unpredicted volatility in the NYMEX Heating Oil contract in the current nine-month period. The decreased loss resulted primarily from: i) the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting as compared to the same period of 2021; this adjustment increased gross profit this period $1.8 million as compared to a decrease in gross profit of $336 and an increase of $898$4.9 million in the threesame prior year period, and nine months ended September 30, 2016, respectively. This change in LIFO resulted in a lower of cost or market adjustment of $1,877, in the three and nine months ended September 30, 2016. No such adjustment impacted gross profit in the three and nine months ended September 30, 2017. Please see footnote 2 for additional discussion.
Biofuels gross profit was further reduced by the change in the activity in derivative instruments in comparison toii) the prior year quarter with a lossperiod was unfavorably impacted by dramatically increased prices of $3,314 as comparednatural gas resulting from Winter Storm Uri which consequently reduced sales volumes when production was curtailed to a gain of $803 in the three months ended September 30, 2017 and 2016, respectively. The change in theminimize natural gas consumption.
In regards to our derivative activity, in the nine months ending September 30, 2017 favorably impacted gross profit with a loss of $1,511, as compared to a loss of $5,375 in the prior year period. In order to better manage the commodity price risk caused by market fluctuations in biofuel prices, we may enter into exchange traded commodity futures and options contracts. We account for these derivative instruments in accordance with accounting standards whereby the fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statement of operations as a component of cost of goods sold within the biofuels segment.
FutureFuel recognizesrecognize all derivative instruments as either assets or liabilities at fair value in itsour consolidated balance sheet. FutureFuel’ssheets. The realized and unrealized derivative gains and losses are recorded as cost of goods sold. 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.
19
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, 2022 | | | December 31, 2021 | |
| | | Contract Quantity | | | Fair Value | | | Contract Quantity | | | Fair Value | |
Regulated fixed price future commitments (in thousand barrels) | | | 229 | | | $ | 2,567 | | | | 142 | | | $ | (485 | ) |
*All derivative instruments are entered into with the standard contract terms and conditions in accordance with major trading authorities of the New York Mercantile Exchange.
Critical Accounting Estimates
Revenue Recognition
The Company recognizes revenue under Topic 606, Revenue from Contracts with Customers. Certain long-term contracts had upfront non-cancellable payments considered material rights. The Company applied the renewal option approach in allocating the transaction price to the material rights. For each of these contracts, the Company estimated the expected contractual volumes to be sold at the most likely expected sales price as a basis for allocating the transaction price to the material right. Estimates are updated quarterly on a prospective basis. These custom chemical contracts have payment terms of 30 days. See Note 3 to our consolidated financial statements.
For most product sales, revenue is recognized when product is shipped from our facilities and risk of loss and title have passed to the customer, which is in accordance with our customer contracts and the stated shipping terms. Nearly all custom manufactured products are manufactured under written contracts.master service agreements. Performance chemicals and biodiesel are generally sold pursuant to the terms of written purchase orders. In general, customers do not have any rights of return, except for quality disputes. All of our products are tested for quality before shipment, and historically returns have been inconsequential. We do not offer rebates, or other warranties.except those related to the BTC.
Biodiesel selling prices can at times fluctuate based on the timing of unsold, internally generated RINs. From time to time, sales of biodiesel are on a “RINs-free” basis. Such method of selling results in applicable RINs being held. The value of the RINs is not reflected in revenue until such time as the RIN sale has been completed.
Revenue from bill and holdbill-and-hold transactions in which a performance obligation exists is recognized when the total performance obligation has been met and title tocontrol of the product has transferred. Bill and holdBill-and-hold transactions for the three and nine months ended September 30, 20172022 and 20162021 were related to specialtycustom chemicals customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use.pickup or delivery 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 a FutureFuel warehouse 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 revenueRevenues under bill and holdbill-and-hold arrangements were $4,519$9,713 and $6,759$26,960 for the three and months ended September 30, 2017 and 2016, and $12,477 and $17,103 for the nine months ended September 30, 2017 and 2016, respectively.2022.
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, 20172022 and 20162021 are set forth in the following chart.table.
| | | Nine months ended September 30, | | | Nine Months Ended September 30, | |
| | | 2017 | | | 2016 | | | 2022 | | | 2021 | |
Net cash provided by operating activities | | $ | 36,440 | | | $ | 76,879 | | | $ | 44,127 | | | $ | 19,827 | |
Net cash used in investing activities | | $ | (14,252 | ) | | $ | (40,444 | ) | |
Net cash provided by (used in) investing activities | | | $ | (2,503 | ) | | $ | 15,891 | |
Net cash used in financing activities | | $ | (108,215 | ) | | $ | (8,111 | ) | | $ | (7,877 | ) | | $ | (117,053 | ) |
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 was $44,127 in the first nine months of 20162022 as compared to $36,440 of cash provided by operating activities$19,828 in the first nine monthssame period of 2017.2021. This decreaseincrease in cash was primarily attributable to the decreasechange in inventory, demonstrating a cash inflow of $30,097$19,328; the change in netbenefit for deferred income the decrease intaxes of $11,935; the change in accounts receivable, including accounts receivable-related parties, of $13,252$9,386; and inventorythe change in fair value of $8,439 offset by the increase in theequity securities of $6,913 also demonstrating cash inflows. Partially offsetting cash inflow was a net change in accounts payable, including accounts payable-related parties, demonstrating a cash outflow of $11,278.
20
$11,429 primarily from the timing of vendor payments; and the change in the fair value of derivative instruments of $5,200 also demonstrating a cash out flow.
Investing Activities
Cash used inby investing activities was $14,252$2,503 in the nine months ended September 30, 2022 as compared to cash provided by investing activities of $15,891 in the nine months ended September 30, 2021. Of the $18,394 change, $18,718 was the result of a decrease in net sales of marketable securities. Such net sales totaled $263 in the first nine months of 20172022, compared to $40,444 used$18,981 in net sales in the first nine months of 2016. This2021. The remaining change was primarily the result of net purchases of marketable securitiesresulted from an increase in the first nine monthscollateralization of 2017 compared to the first nine monthsderivative instruments of 2016. Such net purchases totaled $10,882$3,383 and $33,328,an increase in the first nine months of 2017 and 2016, respectively. Our capital expenditures and customer reimbursements for capital expenditures are summarized in the following table: of $3,027.
| | | 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 | |
Financing Activities
Cash used in financing activities increased to $108,215was $7,877 and $117,053 in the nine months ended September 30, 2022 and 2021, respectively, for payments of dividends on our common stock. This change resulted from the payment of a special dividend of $109,408 in the first nine months of 2017 from $8,111 in the first nine months of 2016. This change is primarily the result of payments of dividends on our common stock in the first nine months of 2017 compared to the first nine months of 2016. The payment of dividends totaled $108,063 and $7,869 in the first nine months of 2017 and 2016, respectively.2021.
Credit Facility
Effective April 16, 2015, we entered intoWe have a new $150,000 secured committed credit facilityagreement with a syndicated group of commercial banks. On May 25, 2016, we increased the facility $15,000.banks for $100,000 as amended on March 30, 2020. 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 9 to our consolidated financial statements ended September 30, 2017 for additional information regarding our Credit Agreement.
We intend to fund future capital requirements for our businesses from cash flow as well as from existing cash, cash investments, and, if the need should arise, borrowings under our credit facility. We do not believe there will be a need to issue any securities to fund such capital requirements.
Dividends
In the first three quartersthree and nine months of 2017,2022 and 2021, we paid a regular quarterly cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $2,625 per quarter$2,626 in each of the first, secondperiods in 2022 and third quarters$2,624 in each of 2017. In the first quarterperiods of 2017,2021. On May 10, 2021 we also paiddeclared a special cash dividend of $2.29$2.50 per share and paid $109,408 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 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.
21
June 4, 2021.
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 2017,2022, as previously reported. Third parties have not placed significant restrictions on our working capital management decisions.
A significant portion of these funds was held in cash or cash equivalents at multiple financial institutions. In the periods ended September 30, 20172022 and December 31, 2016,2021, we also had investments in certain preferred stock, trust preferreddebt securities, exchange 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$39,426 and $106,146$47,190 at September 30, 20172022 and December 31, 2016,2021, respectively.
Lastly, we maintain depositary accounts such as checking accounts, money market accounts, and other similar accounts at selected financial institutions.
22
Off- Balance Sheet Arrangements
We engage in two types of hedging transactions. First, we hedge our biofuels sales through the purchase and sale of futures contracts and options on futures contracts of energy commodities. This activity was captured onin our consolidated balance sheetsheets at September 30, 20172022 and December 31, 2016.2021. 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, 20172022 or December 31, 20162021 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.
23
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 20172022 or 2016.2021. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the consolidated statement of operations as a component of cost of goods sold within the biodiesel segment.
Our immediate recognition of derivative instrument gains and losses can cause net income to be volatile from period to period due to the timing of the change in value of the derivative instruments relative to the volume of biofuel being sold. As ofAt September 30, 20172022 and December 31, 2016,2021, the fair values of our derivative instruments were a net asset of $1,902 and a net liability in the amount of $198 and $258,$485, 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 2017.2022. 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.
24
(VolumeVolume and dollars in thousands)
Item | | Volume Requirements (a) | | Units | | Hypothetical Adverse Change in Price | | Decrease in Gross Profit | | Percentage Decrease in Gross Profit |
Biodiesel Feedstocks | | 247,487 | | LB | | 10% | | $ 7,267 | | 54.0% |
Ultra Low Sulfur Diesel | | 12,150 | | GAL | | 10% | | $ 1,962 | | 14.6% |
Methanol | | 102,450 | | LB | | 10% | | $ 1,660 | | 12.3% |
Electricity | | 86 | | MWH | | 10% | | $ 415 | | 3.1% |
Natural Gas | | 1,006 | | MCF | | 10% | | $ 343 | | 2.6% |
Sodium Methylate | | 8,287 | | LB | | 10% | | $ 332 | | 2.5% |
Coal | | 28 | | Ton | | 10% | | $ 177 | | 1.3% |
(a) Volume requirements and average price information are based upon volumes used and prices obtained for the nine months ended September 30, 2017. Volume requirements may differ materially from these quantities in future years as our business evolves. |
Item | | Volume Requirements (a) | | Units | | Hypothetical Adverse Change in Price | | | Decrease in Gross Profit | | | Percentage Decrease in Gross Profit | |
Biodiesel feedstocks | | | 269,421 | | LB | | | 10.0 | % | | | 18,509 | | | | 134.1 | % |
| Methanol | | | 41,734 | | LB | | | 10.0 | % | | | 821 | | | | 5.9 | % |
| Natural gas | | | 985 | | MCF | | | 10.0 | % | | | 688 | | | | 5.0 | % |
| Electricity | | | 78 | | MWH | | | 10.0 | % | | | 471 | | | | 3.4 | % |
| Sodium methylate | | | 7,788 | | LB | | | 10.0 | % | | | 388 | | | | 2.8 | % |
| Coal | | | 23 | | TON | | | 10.0 | % | | | 256 | | | | 1.9 | % |
| Caustic soda | | | 6,511 | | LB | | | 10.0 | % | | | 137 | | | | 1.0 | % |
(a) Volume requirements and average price information are based upon volumes used and prices obtained for the nine months ended September 30, 2022. Volume requirements may differ materially from these quantities in future years as our business evolves. |
We had no borrowings as ofat September 30, 20172022 or December 31, 20162021 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.
Management’s Evaluation of our Disclosure 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 at March 31, 2022 were not effective as of September 30, 2017 were effectivedescribed below 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.
In the course of preparing the Company’s financial statements for the Form 10-Q, our management concluded that the following is a material weakness in internal control over financial reporting.
The Company’s income tax provision for the three months ended March 31, 2022 was prepared by a related party who failed to properly calculate the income tax valuation allowance and this error was not identified upon review.
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of its financial statements would not be prevented or detected on a timely basis. These deficiencies could result in misstatements to our financial statements that would be material and would not be prevented or detected on a timely basis.
To remediate this deficiency, we plan to utilize a third party to review the valuation allowance for the life of the net operating losses, as well as timely completion of review controls.
Notwithstanding the identified material weaknesses, management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our consolidated financial position, results of operations and cash flows for the period presented.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our last fiscalthe quarter ended September 30, 2022 that have materially affected, or wereare reasonably likely to materially affect, our internal control over financial reporting.
25
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, 20162021 filed with the SEC on March 16, 2017.15, 2022.
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.
26
Special Note Regarding Forward-Looking Information
This report, and the documents incorporated by reference into this report contain forward-looking statements. Forward- lookingForward-looking statements deal with our current plans, intentions, beliefs, and expectations, and statements of future economic performance. Statements containing such terms as “believe,” “do not believe,” “plan,” “expect,” “intend,” “estimate,” “anticipate,” and other phrases of similar meaning are considered to contain uncertainty and are forward-looking statements. In addition, from time to time we or our representatives have made or will make forward-looking statements orally or in writing. Furthermore, such forward-looking statements may be included in various filings that we make with the SEC, or in press releases, or in oral statements made by or with the approval of one of our authorized executive officers.
These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause actual results to differ include, but are not limited to, those set forth under the headings “Risk Factors” and “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in FutureFuel’s Form 10-K Annual Report for the year ended December 31, 20162021 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.
27
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. NovellyTom McKinlay | |
| | |
Paul A. Novelly, Chairman andTom McKinlay, Chief Executive Officer
| |
Executive Officer
| |
| | |
Date: November 9, 2017 2022 | |
| |
| | |
By: | /s/ Rose M. Sparks | |
| | |
Rose M. Sparks, Chief Financial Officer | |
and Principal Financial Officer | |
| | |
Date: November 9, 2017 2022 | |
28
