17 )
| 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 August, 2018 the FASB issued ASU 2018-15, Intangibles – Goodwill and Other –Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
| | These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals.
| | Annual periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including any interim period.
| | The Company plans to adopt the new guidance effective January 1, 2020. The new guidance is expected to have minimal impact.
|
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments.In April and May of 2019, FASB issued ASU 2019-04 and 2019-05 related to codification improvements and targeted transition relief for ASU 2016-13
| | These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
| | Annual periods beginning after December 15, 2019. Earlier adoption was permitted, for annual periods beginning after December 15, 2018.
| | The Company is currently considering the potential impact of this standard on financial reporting and internal controls related to the implementation of the standard as it relates to accounts receivable and debt securities and plans to adopt the new guidance on the effective date of January 1, 2020. The new guidance is expected to have minimal impact.
|
FutureFuel recognizes revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers, and related subsequently issued ASUs (“Topic 606”). Under this standard, FutureFuel recognizes revenue when performance obligations of the sale are satisfied. FutureFuel sells to customers through master sales agreements or standalone purchase orders. The majority of FutureFuel's terms of sale have a single performance obligation to transfer products. Accordingly, FutureFuel recognizes revenue when control has been transferred to the customer, generally at the time of shipment or delivery of products. Under the previous revenue recognition accounting standard (“Topic 605”), FutureFuel recognized revenue upon the transfer of title and risk of loss, generally upon shipment or delivery of goods, although some revenue was recognized on a bill and hold basis.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
A select number of FutureFuel custom chemical contracts within the chemical segment contain a material right as defined by Topic 606 as a result of upfront payments provided by customers. Each contract also has a performance obligation to transfer products with 30-day payment terms. FutureFuel recognizes revenue when the customer takes control of the inventory, either upon shipment or when the material is made available for pickup. FutureFuel has applied the renewal option approach in allocating the transaction price to these material rights and transfer of product. As a basis for allocating the transaction price to the material right and transfer of product, FutureFuel estimated the expected life of the product, the expected contractual volumes to be sold over that life, and the most likely expected sales price. Each estimate is updated quarterly on a prospective basis.
The majority of our revenue is from short term contracts with revenue recognized when a single performance obligation to transfer product under the terms of a contract with a customer are satisfied. Accordingly, FutureFuel recognizes revenue when control is transferred to the customer, which is when products are considered to meet customer specification and title and risk of loss are transferred. This typically occurs at the time of shipment or delivery, however, for certain contracts, this occurs upon delivery of the material to a FutureFuel storage location, ready for customer pickup and separated from other FutureFuel inventory. Revenue is measured as the amount of consideration FutureFuel expects to receive in exchange for transferring products and is generally based upon a negotiated price. FutureFuel sells its products directly to customers generally under agreements with payment terms of 30 to 75 days for chemical segment customers and 3 to 10 days for biofuel segment customers.
Contract Assets and Liabilities:
Contract assets consist of unbilled amounts typically resulting from revenue recognized through bill and hold arrangements. The contract assets are recorded as accounts receivable on the consolidated balance sheet. Contract liabilities consist of advance payments related to material rights. These amounts were historically recorded as deferred revenue which primarily related to upfront capital payments. The contract liabilities are recorded as deferred revenue in the consolidated balance sheets and are reduced as FutureFuel transfers product to the customer under the renewal option approach.
These contract assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
The following table reflects the changes in FutureFuel’s contract assets and contract liabilities.
Contract assets - short-term | | | | | | | | |
| | | Three months ended June 30, | |
| | | 2019 | | | 2018 | |
Beginning balance April 1 | | $ | 1,190 | | | $ | 651 | |
Additions | | | 820 | | | | 1,110 | |
Reductions | | | (1,190 | ) | | | (651 | ) |
Ending balance June 30 | | $ | 820 | | | $ | 1,110 | |
| | | Six months ended June 30, | |
| | | 2019 | | | 2018 | |
Beginning balance January 1 | | $ | 798 | | | $ | 505 | |
Additions | | | 2,010 | | | | 1,761 | |
Reductions | | | (1,988 | ) | | | (1,156 | ) |
Ending balance June 30 | | $ | 820 | | | $ | 1,110 | |
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
Contract liabilities | | | | | | | | |
| | | Three months ended June 30, | |
| | | 2019 | | | 2018 | |
Beginning balance at April 1 | | $ | 20,419 | | | $ | 19,493 | |
Additions | | | 1,471 | | | | 458 | |
Revenue recognized | | | (857 | ) | | | (1,796 | ) |
Ending balance at June 30 | | $ | 21,033 | | | $ | 18,155 | |
| | | Six months ended June 30, | |
| | | 2019 | | | 2018 | |
Beginning balance at January 1 | | $ | 20,332 | | | $ | 21,013 | |
Additions | | | 2,909 | | | | 458 | |
Revenue recognized | | | (2,208 | ) | | | (3,316 | ) |
Ending balance at June 30 | | $ | 21,033 | | | $ | 18,155 | |
Transaction price allocated to the remaining performance obligations:
As of June 30, 2019, approximately $21,033 of revenue is expected to be recognized from remaining performance obligations. FutureFuel expects to recognize this revenue ratably over expected sales over the expected term of its long-term contracts which range from one to five years. Approximately 24% of this revenue is expected to be recognized over the next 12 months, and 76% is expected to be recognized between one and 5 years. These amounts are subject to change based upon changes in the estimated contract life and estimated quantities to be sold over the contract life.
We applied the practical expedient in ASC 606-10-50-14 and have excluded the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Disaggregation of revenue - contractual and non-contractual:
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Contract revenue from customers with > 1 year arrangements | | $ | 11,721 | | | $ | 17,908 | | | $ | 27,139 | | | $ | 33,158 | |
Contract revenue from customer with < 1 year arrangement | | | 59,088 | | | | 70,373 | | | | 92,116 | | | | 124,414 | |
Revenue from non-contractual arrangements | | | 55 | | | | 55 | | | | 110 | | | | 110 | |
BTC rebate | | | - | | | | - | | | | - | | | | (13,599 | ) |
Total revenue | | $ | 70,864 | | | $ | 88,336 | | | $ | 119,365 | | | $ | 144,083 | |
Timing of revenue:
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Bill and hold revenue | | $ | 12,006 | | | $ | 13,373 | | | $ | 23,762 | | | $ | 20,894 | |
Non-bill and hold revenue | | | 58,858 | | | | 74,963 | | | | 95,603 | | | | 123,189 | |
Total revenue | | $ | 70,864 | | | $ | 88,336 | | | $ | 119,365 | | | $ | 144,083 | |
For both long term and short-term contracts, FutureFuel has elected to account for shipping and handling as activities to fulfill the promise to transfer the good. As such, shipping and handling fees billed to customers in a sales transaction are recorded in net sales and shipping and handling costs incurred are recorded in cost of goods sold. FutureFuel has elected to exclude from net sales any taxes which it collects concurrent with revenue-producing activities. These accounting policy elections are consistent with the manner in which FutureFuel historically recorded shipping and handling fees and taxes.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Alldollar amountsexpressedasnumbersinthisMD&Aareinthousands(exceptpershareamounts).
Certaintablesmaynotadddueto rounding.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of FutureFuel Corp. (“FutureFuel”, “the Company”, “we”, or “our”) should be read together with our consolidated financial statements, including the notes thereto, set forth herein. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Actual results may differ materially from those anticipated in these forward-looking statements. See “Forward Looking“Forward-Looking Information” below for additional discussion regarding risks associated with forward-looking statements.
Unless otherwise stated, all dollar amounts are in thousands.
Overview
Our company is managed and reported in two reporting segments: chemicals segment and biofuels segment.biofuels. Within the chemicalschemical segment are two product groupings: custom chemicals and performance chemicals. The custom product group is comprisedcomposed of specialty chemicals manufactured for a single customer whereas the performance product group is comprisedcomposed of chemicals manufactured for multiple customers. The biofuels segment is comprisedcomposed of one product group. Management believes that the diversity of each segment strengthens the company in the ability to utilize resources and is committed to growing each segment.
COVID-19
In March 2020, the World Health Organization categorized COVID-19 as a pandemic. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. Our priority has been to protect the well-being of our employees, support our customers, obtain materials from our suppliers, and maintain our manufacturing operations. We have been able to continue supplying our products to our customers to date, however, some customers have reduced their near-term demand. We have also been able to find alternative sources for raw materials and inputs to meet our near-term supply requirements.
We are closely monitoring the impact of COVID-19 on all aspects of our business, including its impact on our customers, employees, and suppliers. The extent to which COVID-19 impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
Because the magnitude and duration of the COVID-19 pandemic and its economic consequences are unclear, the pandemic’s impact on our performance is difficult to predict. The three principle areas we anticipate COVID-19 to negatively impact our financial performance are through its impact on our customer demand, the impact on our ability to procure raw materials and inputs from suppliers, and our ability to operate our manufacturing facility.
Customer Demand – Several of our major chemical customers sell the products we produce for them in to markets that have been significantly impacted by COVID-19. The energy and automotive markets in particular have drastically been impacted starting in April which we anticipate will reduce chemical segment revenue the remainder of the year based on current estimates. Low diesel prices and a Renewable Identification Number (RIN) market that has stagnated on uncertainty of required mandates has similarly reduced the value of our finished product. The duration of this impact of COVID-19 is clearly difficult to forecast. We currently expect these markets to recover over time. However, the speed at which these market sectors rebound is highly uncertain and will be determined by reopening of economies and restoration of consumer confidence.
Supply Chain Impact – Supplier shutdowns may result in raw material or input shortages and negatively impact our ability to manufacture products and meet our customers’ demand. In our biofuel segment, we are seeing significant contraction among many of our feedstock suppliers. Closures and idling of restaurants (used cooking oil source), ethanol plants (corn oil source), rendering and poultry plants (tallow and grease source) have impacted our traditional supply chain. In addition, supply shortages may impact the timing of when customer facilities reopen and/or increase production and the speed at which customers ramp up production, negatively impacting demand for our products. Lower demand increases the risk that certain suppliers may face financial issues, potentially impacting their ability to supply.
Operations Impact - Our manufacturing is generally considered critical services and our plant remains open to meet customer demand. In an effort to contain the spread of COVID-19, maintain the well-being of our employees, ensure compliance with governmental requirements or respond to declines in demand from customers, we have had, where possible, employees work from home and temporarily closed portions of our offices. We continue to take actions to help prevent the spread of COVID-19 at work including social distancing, expanded cleaning and sanitization, adjusting work hours and temperature checks. To date we have had no negative impact on our ability to operate the plant safely and in a way that meets our customers’ demands.
Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations. For more information on the risks associated with COVID-19, refer to Part II, Item 1A, "Risk Factors" herein.
Summary of Financial Results
Set forth below is a summary of certain consolidated financial information for the periods indicated.
| | | Three Months Ended June 30, | | | Three Months Ended March 31, | |
| | | | | | | | | | | Dollar | | | % | | | | | | | | | | | Dollar | | | % | |
| | | 2019 | | | 2018 | | | Change | | | Change | | | 2020 | | | 2019 | | | Change | | | Change | |
Revenues | | $ | 70,864 | | | $ | 88,336 | | | $ | (17,472 | ) | | | (19.8% | ) | |
Revenue | | | $ | 53,082 | | | $ | 48,501 | | | $ | 4,581 | | | | 9.4 | % |
Income from operations | | $ | 1,185 | | | $ | 5,840 | | | $ | (4,655 | ) | | | (79.7% | ) | | $ | 13,979 | | | $ | 1,211 | | | $ | 12,768 | | | | 1054.3 | % |
Net income | | $ | 3,687 | | | $ | 6,051 | | | $ | (2,364 | ) | | | (39.1% | ) | | $ | 19,043 | | | $ | 5,499 | | | $ | 13,544 | | | | 246.3 | % |
Earnings per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.08 | | | $ | 0.14 | | | $ | (0.06 | ) | | | (42.9% | ) | | $ | 0.44 | | | $ | 0.13 | | | $ | 0.31 | | | | 238.5 | % |
Diluted | | $ | 0.08 | | | $ | 0.14 | | | $ | (0.06 | ) | | | (42.9% | ) | | $ | 0.44 | | | $ | 0.13 | | | $ | 0.31 | | | | 238.5 | % |
Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | | $ | 451 | | | $ | 536 | | | $ | (85 | ) | | | (15.9% | ) | |
Capital expenditures (net of customer reimbursements) | | | $ | 1,287 | | | $ | 423 | | | $ | 864 | | | | 204.3 | % |
Adjusted EBITDA | | $ | 3,384 | | | $ | 11,667 | | | $ | (8,283 | ) | | | (71.0% | ) | | $ | 10,177 | | | $ | 5,415 | | | $ | 4,762 | | | | 87.9 | % |
| | | Six Months Ended June 30, | |
| | | | | | | | | | | Dollar | | | % | |
| | | 2019 | | | 2018 | | | Change | | | Change | |
Revenues | | $ | 119,365 | | | $ | 144,083 | | | $ | (24,718 | ) | | | (17.2% | ) |
Income from operations | | $ | 2,396 | | | $ | 40,407 | | | $ | (38,011 | ) | | | (94.1% | ) |
Net income | | $ | 9,186 | | | $ | 41,877 | | | $ | (32,691 | ) | | | (78.1% | ) |
Earnings per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.21 | | | $ | 0.96 | | | $ | (0.75 | ) | | | (78.1% | ) |
Diluted | | $ | 0.21 | | | $ | 0.96 | | | $ | (0.75 | ) | | | (78.1% | ) |
Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | | $ | 874 | | | $ | 897 | | | $ | (23 | ) | | | (2.6% | ) |
Adjusted EBITDA | | $ | 8,799 | | | $ | 49,264 | | | $ | (40,465 | ) | | | (82.1% | ) |
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 June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | |
Adjusted EBITDA | | $ | 3,384 | | | $ | 11,667 | | | $ | 8,799 | | | $ | 49,264 | | |
Net income | | | $ | 19,043 | | | $ | 5,499 | |
Depreciation | | | (2,747 | ) | | | (2,756 | ) | | | (5,472 | ) | | | (5,512 | ) | | | 3,004 | | | | 2,725 | |
Non-cash stock-based compensation | | | - | | | | (107 | ) | | | - | | | | (214 | ) | | | 49 | | | | - | |
Interest and dividend income | | | 2,750 | | | | 2,153 | | | | 5,112 | | | | 4,145 | | | | (1,967 | ) | | | (2,362 | ) |
Non-cash interest expense (including amortization of deferred financing costs) | | | (44 | ) | | | (43 | ) | | | (87 | ) | | | (86 | ) | |
Losses on disposal of property and equipment | | | (8 | ) | | | (32 | ) | | | (11 | ) | | | (37 | ) | |
Gains/(losses) on derivative instruments | | | 443 | | | | (3,109 | ) | | | (1,033 | ) | | | (3,271 | ) | |
Gains/(losses) on marketable securities | | | 826 | | | | 281 | | | | 3,753 | | | | (4,088 | ) | |
Income tax (expense)/benefit | | | (917 | ) | | | (2,003 | ) | | | (1,875 | ) | | | 1,676 | | |
Net income | | $ | 3,687 | | | $ | 6,051 | | | $ | 9,186 | | | $ | 41,877 | | |
Non-cash interest expense and amortization of deferred financing costs | | | | 56 | | | | 43 | |
Loss on disposal of property and equipment | | | | 2 | | | | 3 | |
(Gain) loss on derivative instruments | | | | (6,857 | ) | | | 1,476 | |
Loss (gain) on marketable securities | | | | 10,059 | | | | (2,927 | ) |
Income tax (benefit) provision | | | | (13,212 | ) | | | 958 | |
Adjusted EBITDA | | | $ | 10,177 | | | $ | 5,415 | |
The following table reconciles adjusted EBITDA with cash flows from operations, the most directly comparable GAAP liquidity financial measure.measure, with adjusted EBITDA.
| | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| | | 2019 | | | 2018 | | | 2020 | | | 2019 | |
Net cash provided by operating activities | | | $ | 4,034 | | | $ | (3,289 | ) |
Benefit for deferred income taxes | | | | 22 | | | | 415 | |
Interest and dividend income | | | | (1,967 | ) | | | (2,362 | ) |
Income tax provision | | | | (13,212 | ) | | | 958 | |
(Gain) loss on derivative instruments | | | | (6,857 | ) | | | 1,476 | |
Change in fair value of derivative instruments | | | | 1,874 | | | | 286 | |
Change in operating assets and liabilities, net | | | | 26,282 | | | | 7,930 | |
Other | | | | 1 | | | | 1 | |
Adjusted EBITDA | | $ | 8,799 | | | $ | 49,264 | | | $ | 10,177 | | | $ | 5,415 | |
Benefit for deferred income taxes | | | (445 | ) | | | (3,885 | ) | |
Impairment of fixed assets | | | 130 | | | | 171 | | |
Interest and dividend income | | | 5,112 | | | | 4,145 | | |
Income tax (expense)/benefit | | | (1,875 | ) | | | 1,676 | | |
Losses on derivative instruments | | | (1,033 | ) | | | (3,271 | ) | |
Change in fair value of derivative instruments | | | (297 | ) | | | (1,559 | ) | |
Changes in operating assets and liabilities, net | | | 3,137 | | | | 18,819 | | |
Other | | | (1 | ) | | | - | | |
Net cash provided by operating activities | | $ | 13,527 | | | $ | 65,360 | | |
Results of Operations
Consolidated
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| | | | | | | Change | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2019 | | | 2018 | | | Amount | | | % | | | 2019 | | | 2018 | | | Amount | | | % | | | 2020 | | | 2019 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 70,864 | | | $ | 88,336 | | | $ | (17,472 | ) | | | (19.8 | )% | | $ | 119,365 | | | $ | 144,083 | | | $ | (24,718 | ) | | | (17.2 | )% | | $ | 53,082 | | | $ | 48,501 | | | $ | 4,581 | | | | 9.4 | % |
Volume/product mix effect | | | | | | | | | | $ | (10,753 | ) | | | (12.2 | )% | | | | | | | | | | $ | (27,570 | ) | | | (19.1 | )% | | | | | | | | | | $ | 12,762 | | | | 26.3 | % |
Price effect | | | | | | | | | | $ | (6,719 | ) | | | (7.6 | )% | | | | | | | | | | $ | 2,852 | | | | 2.0 | % | | | | | | | | | | $ | (8,181 | ) | | | (16.9 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 3,270 | | | $ | 8,271 | | | $ | (5,001 | ) | | | (60.5 | )% | | $ | 6,532 | | | $ | 45,778 | | | $ | (39,246 | ) | | | (85.7 | )% | | $ | 16,399 | | | $ | 3,262 | | | $ | 13,137 | | | | 402.7 | % |
Consolidated sales revenue in the three and six months ended June 30, 2019 decreased $17,472 and $24,718, respectively,March 31, 2020 increased $4,581 compared to the three and six months ended June 30, 2018.March 31, 2019. This decreaseincrease primarily resulted from decreasedincreased sales volumes in biodiesel and chemicals. In addition, in the three-month period ended June 30, 2019, sales revenue was reduced by lower average selling prices in our biofuel segment. Partially offsetting the six-month period decrease was higher average selling prices in the biofuels segment that were partially offset by decreased prices of $2,191, as compared withbiodiesel in the same period in 2018. The prior year period was unfavorably impacted by rebates to customers that resulted from the retroactive reinstatement of the 2017 blenders’ tax credit (BTC) passed into law on February 9, 2018. The BTC has not been reinstated beyond 2017, therefore, these rebates did not reoccur in 2019. Please see Note 2 for additional discussion.three-month period.
Gross profit in the three and six months ended June 30, 2019 decreased $5,001 and $39,246, respectively,March 31, 2020 increased $13,137 compared to the three and six months ended June 30, 2018.March 31, 2019. This decrease wasincrease primarily fromresulted from: i) the biofuel segment withblenders’ tax credit (“BTC”) being in effect for the current period versus not being in effect in the prior year period benefiting from the aforementioned BTC which was not in law in 2019. Also negatively impacting gross profit in the current periods was reduced sales volumes in both the biofuels segmentthree-month period; and chemical segment. Partially offsetting these decreases in gross profit was the favorable impact ofii) the change in the unrealized and realized activity in derivative instruments with a gain of $443$6,857 in the three months ended June 30, 2019March 31, 2020 as compared to a loss of $3,109$1,476 in the three months ended June 30, 2018 and a loss of $1,033March 31, 2019. Also benefiting gross profit in both the sixthree months ended June 30,March 31, 2020 and 2019 as compared to a loss of $3,271 in the same period of 2018. Additionally, gross profit was favorably impacted in the three and six months ended June 30, 2019, as compared to the three and six months ended June 30, 2018, by the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment increased gross profit of $287by $1,319 and $1,924 in the three and six months ended June 30, 2019 as compared to a decrease in gross profit of $2,330 and $1,998 in the three and six months ended June 30, 2018,$1,637, respectively.
Operating Expenses
Operating expenses decreased $346 and $1,235increased $369 in the three and six months ended June 30, 2019,March 31, 2020, as compared to the three and six monthsthree-months ended June 30, 2018.March 31, 2019. This decreaseslight increase was primarily from reduced compensation expense.increased research and development expenses.
Income Tax Provision
The effective tax rate for IncomeTaxesthe three-months ended March 31, 2020 reflects the positive effect of the reinstatement of certain tax credits and incentives for 2020, the most significant of which was the BTC and Small Agri-biodiesel Producer Tax Credit. The BTC and Small Producer Agri-biodiesel Producer Credit was retroactively extended for 2018 and 2019 on December 20, 2019 and further extended through December 31, 2022. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“CARES Act”). The CARES Act provides that Net Operating 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 months ended March 31, 2020 as FutureFuel will be able to carryback its 2019 federal NOL to a year with a higher tax rate rather than forward to a year with a lower tax rate.
The effective tax rate for the three months ended June 30,March 31, 2019 reflects the unfavorable effect of the BTC and 2018 reflects our expected tax rate on reported operating income before income tax. The three-month effective rate ended June 30, 2019 is expected to continueSmall Producer Agri-biodiesel Producer Credit not being in the law for the remainderfirst quarter of the year.
2019. The effective tax rate for the six months ended June 30, 2019 was also favorably impacted by FutureFuel being grantedfrom a retroactive research and development credit for a prior year in a state where itFutureFuel does significant business. Comparatively, the six months ended June 30, 2018, reflects the favorable effect of the BTC and Small Agri-biodiesel Producer Tax Credit (2017 BTC was reinstated in the three months ended
There were no unrecognized tax benefits at March 31, 2018), which were not in law in 2019.
Unrecognized tax benefits totaled $2,804 at June 30, 2019 and2020 or December 31, 2018.2019.
FutureFuel recordsrecorded interest and penalties, net, as a component of income tax provision for income taxes. FutureFueland had accrued balances of $734($3) and $681($557) at June 30, 2019March 31, 2020 and December 31, 2018, respectively, for interest and penalties.2019, respectively.
Net Income
Net income for the three and six months ended June 30, 2019 decreased $2,364 and $32,691, respectively,March 31, 2020 increased $13,544 as compared to the same periodsperiod in 2018. The decrease in the three-month period2019. This increase resulted primarily from lower sales volumes of agro/energy chemicals and biodiesel. The decrease in the six-month period resulted primarily from the absence of biodiesel tax credits and incentives that were in laweffect in the prior year andthree months ended March 31, 2020 that were not in effect for 2019.
2019 (see Note 2) and tax benefits in effect in the first quarter of 2020 not in effect for the same period in 2019, see the income tax provision discussion above. Partially offsetting this increase was the unrealized loss on equity securities.
ChemicalsChemical Segment
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2019 | | | 2018 | | | Amount | | | % | | | 2019 | | | 2018 | | | Amount | | | % | | | 2020 | | | 2019 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 25,859 | | | $ | 31,527 | | | $ | (5,668 | ) | | | (18.0 | )% | | $ | 53,211 | | | $ | 60,608 | | | $ | (7,397 | ) | | | (12.2 | )% | | $ | 27,693 | | | $ | 27,352 | | | $ | 341 | | | | 1.2 | % |
Volume/product mix effect | | | | | | | | | | $ | (5,787 | ) | | | (18.4 | )% | | | | | | | | | | $ | (8,058 | ) | | | (13.3 | )% | | | | | | | | | | $ | 879 | | | | 3.2 | % |
Price effect | | | | | | | | | | $ | 119 | | | | 0.4 | % | | | | | | | | | | $ | 661 | | | | 1.1 | % | | | | | | | | | | $ | (538 | ) | | | (2.0 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 7,181 | | | $ | 8,016 | | | $ | (835 | ) | | | (10.4 | )% | | $ | 14,490 | | | $ | 15,572 | | | $ | (1,082 | ) | | | (6.9 | )% | | $ | 8,014 | | | $ | 7,309 | | | $ | 705 | | | | 9.6 | % |
Sales
Chemical revenue in the three months ended June 30, 2019 decreased 18%March 31, 2020 increased 1.2% or $5,668$341 compared to the three months ended June 30, 2018. Sales revenueMarch 31, 2019. Revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months ended June 30, 2019March 31, 2020 totaled $21,965, a decrease$23,760, an increase of $5,107$60 from the same period in 2018. This decrease was primarily attributed2019. Increased sales of products sold to decreasedthe energy market were mostly offset by declines in agrochemical sales volumes in the agrochemical and energy markets and included a planned shutdown of a process line to expand capacity.volumes. Performance chemicals (comprised(composed of multi-customer products which are sold based on specification) sales revenues were $3,894revenue was $3,933 in the three months ended June 30, 2019, a decreaseMarch 31, 2020, an increase of $561$281 from the three months ended June 30, 2018.March 31, 2019. This decreaseincrease was primarily from reducedincreased sales volume of glycerin and slower sales of a polymer modifier used in the carpet industry.
Sales revenue in the six months ended June 30, 2019 decreased 12% or $7,397 compared to the six months ended June 30, 2018. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the six months ended June 30, 2019 totaled $45,665, a decrease of $4,827 from the same period in 2018. This decrease was primarily attributed to decreased sales volumes in the agrochemical and energy markets and included a planned shutdown of a process line to expand capacity. Performance chemicals (comprised of multi-customer products which are sold based on specification) sales revenues were $7,546 in the six months ended June 30, 2019, a decreasereduced supply of $2,570 from the six months ended June 30, 2018. This decrease was primarily from reduced sales volume of glycerin and slower sales of a polymer modifier used in the carpet industry.imported material.
Gross profit for the chemicalschemical segment for the three and six months ended June 30, 2019 decreased $835 and $1,082, respectively,March 31, 2020, increased 9.6% or $705 when compared to the same period of 2018.2019. This decreaseincrease was driven mostly by favorable sales volume declines in the agrochemical and energy market as discussed above. Partially offsetting this decline was improved throughput in our custom chemicals due to production scheduling for annual maintenance, favorable product mix of products we campaign, and a benefit from the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. The change in this adjustment increased the chemical segment gross profit in the three and six month periods ending June 30, 2019 by $217 and $744, respectively, as compared to a decrease in gross profit of $627 and $438, in the same respective periods of 2018.market.
Biofuels Segment
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| | | | | | | | | | | Change | | | | | | | | | | | Change | | | | | | | | | | | Change | |
| | | 2019 | | | 2018 | | | Amount | | | % | | | 2019 | | | 2018 | | | Amount | | | % | | | 2020 | | | 2019 | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 45,005 | | | $ | 56,809 | | | $ | (11,804 | ) | | | (20.8 | )% | | $ | 66,154 | | | $ | 83,475 | | | $ | (17,321 | ) | | | (20.7 | )% | | $ | 25,389 | | | $ | 21,149 | | | $ | 4,240 | | | | 20.0 | % |
Volume/product mix effect | | | | | | | | | | $ | (4,966 | ) | | | (8.7 | )% | | | | | | | | | | $ | (19,512 | ) | | | (23.4 | )% | | | | | | | | | | $ | 11,883 | | | | 56.2 | % |
Price effect | | | | | | | | | | $ | (6,838 | ) | | | (12.0 | )% | | | | | | | | | | $ | 2,191 | | | | 2.6 | % | | | | | | | | | | $ | (7,643 | ) | | | (36.1 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | (3,911 | ) | | $ | 255 | | | $ | (4,166 | ) | | | (1633.5 | )% | | $ | (7,958 | ) | | $ | 30,206 | | | $ | (38,164 | ) | | | (126.3 | )% | | $ | 8,385 | | | $ | (4,047 | ) | | $ | 12,432 | | | | (307.2 | %) |
Biofuels sales revenue in the three and six months ended June 30, 2019 decreased $11,804 and $17,321, respectively,March 31, 2020 increased $4,240 as compared to the same periodsperiod of 2018.2019. The biodiesel and biodiesel blend volumes decreased in both the three and six month periodsincreased as compared to the prior year, primarily from a stronger market with the lack of sourcing profitable feedstock. In addition,BTC in effect in the three-months ending June 30, 2019current quarter and not in effect in the prior year period. Partially offsetting this increase in the three months ended March 31, 2020 as compared to the same period of 2018,2019, was lower selling priceprices. Global fuel markets were impacted by reduced revenue 12% or $6,838. Indemand for oil caused by the six-month period ended June 30, 2019 as compared to the same period of 2018, net sales prices increased revenue 2.6% or $2,191. In the six-month period ended June 30, 2018, sales revenue included rebates that resulted from the retroactive reinstatementeconomic impact of the 2017 BTC.COVID-19 pandemic and a lack of support by oil producing nations to cut supply. These rebates represented a lower sales pricefactors resulted in the six months ended June 30, 2018; these rebates were not presentsignificant declines in the six-month period ending June 30, 2019. The BTC has not been reinstated beyond 2017. Please see Note 2 for additional discussion.petroleum and biodiesel oil prices.
RevenueBiofuels revenue from common carrier pipelines varies as its revenue recognition depends upon whether a transaction is bought from and sold to the same party. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another (including buy/sell agreements) are combined and recorded on a net basis. Additionally, revenue from common carrier pipelines fluctuates with market conditions. Revenue from net transactions increased $121$169 in the sixthree months ended June 30, 2019March 31, 2020 as compared to the sixthree months ended June 30, 2018.March 31, 2019.
A significant portion of our biodiesel sold was to one major refiner/blender in 2019 and 2018.in the first quarter of 2020 there were no significant customer concentrations. No assurances can be given that we will continue to sell to such major refiners, or, if we do sell, the volume we will sell or the profit margin we will realize. We do not believe that the loss of these customersthis customer would have a material adverse effect on our biofuels segment or on us as a whole because: (i) unlike our custom manufacturing products, biodiesel is a commodity with a large potential customer base; (ii) we believe that we could readily sell our biodiesel to other customers as potential demand from other customers for biodiesel exceeds our production capacity; (iii)(ii) our sales to these customers are not under fixed terms and the customers have no fixed obligation to purchase any minimum quantities except as stipulated by short termshort-term purchase orders; and (iv)(iii) the prices we receive from these customers are based upon then-market rates, as would be the case with sales of this commodity to other customers.
Biofuels gross profit was $8,385 in the three months ended June 30, 2019 decreased $4,166 whenMarch 31, 2020, as compared to a gross loss of $4,047 in the same period of 2018. Gross profit2019, primarily from: i) increased sales volumes given improved market conditions with the BTC in effect (which was benefitednot in effect in the prior year period); ii) the change in the activity in derivative instruments with a gain of $6,857 in the three months ended June 30, 2018 by higher sales volumes. PartiallyMarch 31, 2020, as compared to a loss of $1,476 in the same period of 2019. Also benefiting gross profit in the three monthsboth three-month periods ended June 30,March 31, 2020 and 2019 was the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting as compared to the same period in 2018.accounting. This adjustment increased gross profit $70 in the three months ended June 30, 2019, compared to a decrease in gross profit of $1,703 in the three months ended June 30, 2018.$817 and $1,110, respectively.
Biofuels gross profit was also benefited by the change in the activity in derivative instruments with a gain of $443 in the three months ended June 30, 2019, as compared to a loss of $3,109 in the same period of 2018. In order to better manage the commodity price risk caused by market fluctuations in biofuel prices, we may enter into exchange traded commodity futures and options contracts. We account for these derivative instruments in accordance with accounting standards whereby the fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statement of operations as a component of cost of goods sold within the biofuels segment.
FutureFuel recognizesrecognize all derivative instruments as either assets or liabilities at fair value in itsour consolidated balance sheet. FutureFuel’ssheets. Our derivative instruments do not qualify for hedge accounting under the specific guidelines of Topic 815, Derivatives and Hedging. None of the derivative instruments are designated and accounted for as hedges primarily due primarily to the extensive record keeping requirements.
In the six-month period ended June 30, 2019, biofuels gross profit decreased $38,164 when compared to the same period of 2018. The change was primarily from the retroactive reinstatement of the 2017 BTC, totaling $28,869, which benefited the first six months of 2018 and has not been reinstated past December 31, 2017. Further reducing gross profit was lower sales volumes in the six months of 2019 as compared to the same period of 2018. Gross profit was partially benefited in 2019, as compared to 2018, by the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment increased gross profit $1,180 in the six months ended June 30, 2019, as compared to a decrease of $1,560 in the six months ended June 30, 2018. In addition, Biofuels gross profit was impacted by the change in the activity in derivative instruments with a loss of $1,033 in the three months ended June 30, 2019, as compared to a loss of $3,271 in the same period of 2018.
The volumes and carrying values of FutureFuel’sour derivative instruments were as follows:
| | | June 30, 2019 | | | December 31, 2018 | |
| | | Contract quantity | | | Fair Value | | | Contract quantity Short | | | Fair Value | |
Regulated options, included in other current assets | | | - | | | $ | - | | | | 100 | | | $ | (484 | ) |
Regulated fixed price future commitments, included in other current assets | | | - | | | $ | - | | | | 96 | | | $ | 187 | |
| | | Asset (Liability) | |
| | | March 31, 2020 | | | December 31, 2019 | |
| | | Contract Quantity Short | | | Fair Value | | | Contract Quantity Short | | | Fair Value | |
Regulated fixed price future commitments | | | 128 | | | $ | 1,607 | | | | 140 | | | $ | (267 | ) |
*All derivative instruments are entered into with the standard contract terms and conditions in accordance with major trading authorities of the New York Mercantile Exchange.
Critical Accounting Estimates
Revenue Recognition
The Company recognizes revenue under Topic 606, Revenue from Contracts with Customers. Certain long-term contracts had upfront non-cancellable payments considered material rights. The Company applied the renewal option approach in allocating the transaction price to the material rights. For each of these contracts, the Company estimated the expected contractual volumes to be sold at the most likely expected sales price as a basis for allocating the transaction price to the material right. Estimates are updated quarterly on a prospective basis. These custom chemical contracts have payment terms of 30 days. Please seeSee Note 18 for additional discussion.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 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, 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 control of the product has transferred. Bill and holdBill-and-hold transactions for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 were related to custom chemicals customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use by the customer. These sales were subject to written monthly purchase orders with agreement that production was reasonable. The product 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 custom chemicals customers. Sales revenueRevenue under bill and holdbill-and-hold arrangements were $12,006$10,153 and $13,373$11,756 for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively. For the six months ended June 30, 2019 and 2018, bill and hold sales revenue was $23,762 and $20,894, respectively.
Liquidity and Capital Resources
Our net cash from operating activities, investing activities, and financing activities for the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 are set forth in the following table.
| | | Six Months Ended June 30, | |
| | | 2019 | | | 2018 | |
Net cash from operating activities | | $ | 13,527 | | | $ | 65,360 | |
Net cash from investing activities | | $ | (379 | ) | | $ | 25,182 | |
Net cash from financing activities | | $ | (5,249 | ) | | $ | (5,248 | ) |
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2019 | |
Net cash provided by (used in) operating activities | | $ | 4,034 | | | $ | (3,289 | ) |
Net cash provided by (used in) investing activities | | $ | 3,838 | | | $ | (3,038 | ) |
Net cash used in financing activities | | $ | (3,101 | ) | | $ | (2,624 | ) |
We believe that existing cash balances and cash flow to be generated from operating activities and borrowing capacity under the amended and restated credit agreement will be sufficient to fund operations, product development, cash dividends, and capital requirements for the foreseeable future. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition.
Operating Activities
Cash from operating activities decreased from $65,360 of cashwas provided by operating activities of $4,034 in the first six monthsquarter of 20182020 as compared to $13,527$3,289 of cash provided in operating activitiesused in the first six monthsquarter of 2019. This $51,833 decrease$7,323 increase was primarily attributable to the decrease of $32,691change in net income the decreaseof $5,499 in the first quarter of 2019 compared to $19,043 for the same period in 2020 for a net increase of $13,544. Also contributing to the cash inflows from operations in the first quarter of 2020, by comparison to the first quarter of 2019, there was a net cash inflow resulting from fair value adjustments to equity securities of approximately $12,578 and from less cash outflows from inventory reductions of $10,048 during the first quarter of 2020 compared to the first quarter of 2019. Partially offsetting these net cash inflows, there was a net change in the income tax receivable, demonstrating a cash outflow of $13,587 in the first quarter of 2020 as compared to a cash inflow of $1,340, and a net change in accounts payable,receivable, including accounts payable - relatedreceivable-related parties, demonstrating a cash outflow of $16,204 and the decrease$13,628 in the changefirst quarter of 2020 as compared to a cash inflow of $400 in the fair valuefirst quarter of equity securities, of $11,305. 2019.
Investing Activities
Cash from investing activities decreasedincreased from $25,182$3,038 of cash used in the first three months of 2019 to $3,838 of cash provided by investing activities in the first sixthree months of 2018 to $379 of cash used in investing activities in2020. Of the first six months of 2019. Of this$6,876 change, $21,669$8,132 was the result of decreased cash inflows froma decrease in net salespurchases of marketable securities in the first sixthree months of 20192020 compared to the first three months of 2019. Such net salespurchases totaled $964, in the first sixthree months of 2018. Such2020, compared to $9,096 in net sales totaled $3,359,purchases in the first sixthree months of 2019, compared to $25,028 in net sales in the first six months of 2018.2019. Our capital expenditures and customer reimbursements for capital expenditures for the sixthree months ended June 30,March 31, 2020 and 2019 and 2018, are summarized in the following table:
| | | Six Months Ended June 30, | |
| | | 2019 | | | 2018 | |
Cash paid for capital expenditures and intangibles | | $ | 4,659 | | | $ | 1,103 | |
Cash received as reimbursement of capital expenditures* | | $ | (3,785 | ) | | $ | (206 | ) |
Cash paid, net of reimbursement, for capital expenditures | | $ | 874 | | | $ | 897 | |
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2019 | |
Cash paid for capital expenditures | | $ | 1,608 | | | $ | 2,246 | |
Cash received from customers as reimbursement of capital expenditures* | | $ | (321 | ) | | $ | (1,823 | ) |
Cash paid for capital expenditures, net of reimbursements | | $ | 1,287 | | | $ | 423 | |
*This receipt of cash was reported as an increase in deferred revenue in cash flows from operations.
Financing Activities
Cash used in financing activities of $5,249was $3,101 and $5,248,$2,624, in the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively. This isThe increase of $477 was related to Debt origination costs in the resultthree months ended March 31, 2020 from the amendment of our existing credit facility. The remaining $2,624 resulted from payments of dividends on our common stock in for the first sixthree months of 20192020 and 2018.2019.
Credit Facility
Effective April 16, 2015,March 30, 2020, we entered into a new $150,000 secured committedan amended and restated credit facilityagreement with a syndicated group of commercial banks. On May 25, 2016, we increased the facility $15,000.banks for $100,000. The loan is a revolving facility, the proceeds of which may be used for our working capital, capital expenditures, and general corporate purposes. The facility terminates on April 16, 2020.March 30, 2025. See Note 710 to our consolidated financial statements 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 sixthree months of 20192020 and 2018,2019, we paid a regular quarterly cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $5,249 and $5,248$2,624 in each period. In the three months ended March 31, 2020, we also declared a special cash dividend of $3.00 per share in the six month periods ended June 30, 2019 and 2018, respectively.amount of $131,230 that was payable on April 17, 2020.
Capital Management
As a result of our initial equity offering, our subsequent positive operating results, the exercise of warrants, and the issuance of shares in our at-the-market offering, we accumulated excess working capital. Some of this excess working capital has been paid out as special and regular cash dividends. Additionally, regular and special cash dividends will be paid in 2019,2020, as previously reported. Third parties have not placed significant restrictions on our working capital management decisions.
A significant portion of these funds was held in cash or cash equivalents at multiple financial institutions. In the periods ended June 30, 2019March 31, 2020 and December 31, 2018,2019, 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 the debt securities as being “available-for-sale.” Accordingly, the 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 the debt securities and equity instruments totaled $80,560$59,644 and $79,888$73,620 at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
Lastly, we maintain depositary accounts such as checking accounts, money market accounts, and other similar accounts at selected financial institutions.
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 June 30, 2019March 31, 2020 and December 31, 2018.2019. 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 June 30, 2019March 31, 2020 or December 31, 20182019 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.
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 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 three months of 20192020 or 2018.2019. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the consolidated statement of operations as a component of cost of goods sold within the biodiesel segment.
Our immediate recognition of derivative instrument gains and losses can cause net income to be volatile from period to period due to the timing of the change in value of the derivative instruments relative to the volume of biofuel being sold. As of June 30, 2019At March 31, 2020 and December 31, 2018,2019, the fair values of our derivative instruments were a net asset of $1,607 and a net liability in the amount of $0 and $297,$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 sixthree months of 2019.2020. 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.
(Volume 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 | | | 158,114 | | LB | | | 10.0% | | | | 4,301 | | | | 60.8% | |
Methanol | | | 74,428 | | LB | | | 10.0% | | | | 1,377 | | | | 21.1% | |
Electricity | | | 60 | | MWH | | | 10.0% | | | | 323 | | | | 4.9% | |
Natural Gas | | | 650 | | MCF | | | 10.0% | | | | 201 | | | | 3.1% | |
Sodium Methylate | | | 4,297 | | LB | | | 10.0% | | | | 168 | | | | 2.6% | |
Coal | | | 19 | | Ton | | | 10.0% | | | | 121 | | | | 1.9% | |
Caustic soda | | | 6,309 | | LB | | | 10.0% | | | | 83 | | | | 1.3% | |
(a) Volume requirements and average price information are based upon volumes used and prices obtained for the six months ended June 30, 2019. Volume requirements may differ materially from these quantities in future years as our business evolves. | |
Item | | Volume Requirements (a) | | Units | | Hypothetical Adverse Change in Price | | | Decrease in Gross Profit | | | Percentage Decrease in Gross Profit | |
Biodiesel feedstocks | | | 97,206 | | LB | | | 10.0 | % | | | 2,625 | | | | 4.9 | % |
(a) Volume requirements and average price information are based upon volumes used and prices obtained for the three months ended March 31, 2020. Volume requirements may differ materially from these quantities in future years as our business evolves. |
We had no borrowings as of June 30, 2019at March 31, 2020 or December 31, 20182019 and, as such, we were not exposed to interest rate risk for those periods. Due to the relative insignificance of transactions denominated in foreign currency, we consider our foreign currency risk to be immaterial.
Item 4. Controls and Procedures.
Under the supervision and with the participation of our chief executive officer and our principal financial officer and other senior management personnel, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and our principal financial officer have concluded that these disclosure controls and procedures as of June 30, 2019at March 31, 2020 were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
There were no changes in our internal control over financial reporting during our last fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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, 20182019 filed with the SEC on March 15, 2019.13, 2020, except for the addition of the Risk Factor below:
We are subject to risks associated with public health threats and epidemics, including the novel coronavirus ("COVID-19").
We are subject to risks associated with public health threats and epidemics, including the global health concerns relating to the COVID-19 pandemic. The global pandemic has adversely impacted and is likely to further adversely impact our business and markets, including our workforce and operations and the operations of our customers and suppliers. In particular, we may experience material financial or operational impacts, including:
• | Significant volatility or reductions in demand for our products; |
• | Delays in obtaining regulatory clearances and approvals to market our products; |
• | The failure of third parties on which we rely to meet their obligations to the Company to supply the Company with methanol, which the Company requires for several manufacturing processes; |
• | The failure of third parties on which we rely to meet their other obligations to the Company, or significant disruptions in their ability to do so; or |
• | The inability to meet our customers’ needs due to disruptions to our operations or the operations of our third-party suppliers, contractors, logistics partners or customers including disruptions to production, development, manufacturing, administrative and supply operations and arrangements. |
The extent to which the COVID-19 global pandemic and measures taken in response thereto impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and our results of operations and many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019 may be heightened.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
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 Discussion and Analysis of Financial Condition and Results of Operations” in FutureFuel’s Form 10-K Annual Report for the year ended December 31, 20182019 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.
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: August 9, 2019May 8, 2020 | |
| |
| | |
By: | /s/ Rose M. Sparks | |
| | |
Rose M. Sparks, Chief Financial Officer | |
and Principal Financial Officer | |
| | |
Date: August 9, 2019May 8, 2020 | |
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