UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ___________ | |
Commission file number: 0-52577 |
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
| 20-3340900 |
(State or Other Jurisdiction of |
| (IRS Employer Identification No.) |
Incorporation or Organization) |
|
|
8235 Forsyth Blvd., Suite 400, St Louis, Missouri | 63105 | |
(Address of Principal Executive Offices) | (Zip Code) | |
(314) 854-8352 | ||
(Registrant’s Telephone Number, Including Area Code) |
(314) 854-8352
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | FF | NYSE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes √☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes √☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ |
| Accelerated filer |
|
|
Non-accelerated filer ☐ |
| Smaller reporting company | ☐ |
|
|
| Emerging growth company | ☐ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No √☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of NovemberMay 8, 2019:2020: 43,743,243
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
FutureFuel Corp.
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited) | (Unaudited) | |||||||||||||||
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 235,945 | $ | 214,972 | $ | 248,102 | $ | 243,331 | ||||||||
Accounts receivable, net of allowance for bad debts of $0 | 20,820 | 16,294 | ||||||||||||||
Accounts receivable, inclusive of the blenders' tax credit of $108,599 and $97,295 at March 31, 2020 and December 31, 2019, respectively, and net of allowances for bad debt of $33 and $0 at March 31, 2020 and December 31, 2019, respectively | 128,055 | 110,264 | ||||||||||||||
Accounts receivable – related parties | 22 | 1,844 | 427 | 4,602 | ||||||||||||
Inventory | 42,789 | 39,296 | 41,451 | 37,573 | ||||||||||||
Income tax receivable | 367 | 6,858 | 21,649 | 8,062 | ||||||||||||
Prepaid expenses | 510 | 1,767 | 1,761 | 1,932 | ||||||||||||
Prepaid expenses – related parties | 12 | 12 | 12 | 12 | ||||||||||||
Marketable securities | 75,583 | 79,888 | 59,644 | 73,620 | ||||||||||||
Deferred financing costs | 72 | 144 | ||||||||||||||
Other current assets | 870 | 1,255 | 1,610 | 1,493 | ||||||||||||
Total current assets | 376,990 | 362,330 | 502,711 | 480,889 | ||||||||||||
Property, plant and equipment, net | 100,320 | 103,575 | 96,946 | 98,597 | ||||||||||||
Intangible assets | 1,408 | 1,408 | 1,408 | 1,408 | ||||||||||||
Deferred financing costs | - | 36 | ||||||||||||||
Other noncurrent assets | 5,548 | 3,806 | 5,813 | 5,611 | ||||||||||||
Total noncurrent assets | 107,276 | 108,825 | 104,167 | 105,616 | ||||||||||||
Total Assets | $ | 484,266 | $ | 471,155 | $ | 606,878 | $ | 586,505 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Accounts payable | $ | 25,632 | $ | 19,981 | ||||||||||||
Accounts payable, inclusive of the blenders' tax credit rebates due customers of $41,440 and $39,423 | $ | 63,456 | $ | 61,299 | ||||||||||||
Accounts payable – related parties | 972 | 1,689 | 440 | 1,255 | ||||||||||||
Deferred revenue – short-term | 5,232 | 4,581 | 4,093 | 5,237 | ||||||||||||
Dividends payable | 2,625 | 10,498 | 139,104 | 10,498 | ||||||||||||
Accrued expenses and other current liabilities | 5,227 | 2,742 | 6,602 | 4,410 | ||||||||||||
Accrued expenses and other current liabilities – related parties | - | 64 | ||||||||||||||
Total current liabilities | 39,688 | 39,491 | 213,695 | 82,763 | ||||||||||||
Deferred revenue – long-term | 19,394 | 20,319 | 23,360 | 21,291 | ||||||||||||
Noncurrent deferred income tax liability | 17,813 | 18,026 | 12,859 | 12,965 | ||||||||||||
Other noncurrent liabilities | 2,244 | 4,241 | 2,329 | 2,388 | ||||||||||||
Total noncurrent liabilities | 39,451 | 42,586 | 38,548 | 36,644 | ||||||||||||
Total liabilities | 79,139 | 82,077 | 252,243 | 119,407 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding | - | - | - | - | ||||||||||||
Common stock, $0.0001 par value, 75,000,000 shares authorized, 43,743,243, issued and outstanding at September 30, 2019 and December 31, 2018 | 4 | 4 | ||||||||||||||
Accumulated other comprehensive income (loss) | 200 | (20 | ) | |||||||||||||
Common stock, $0.0001 par value, 75,000,000 shares authorized, 43,743,243, issued and outstanding at March 31, 2020 and December 31, 2019 | 4 | 4 | ||||||||||||||
Accumulated other comprehensive (loss) income | (17 | ) | 296 | |||||||||||||
Additional paid in capital | 282,166 | 282,145 | 282,215 | 282,166 | ||||||||||||
Retained earnings | 122,757 | 106,949 | 72,433 | 184,632 | ||||||||||||
Total stockholders’ equity | 405,127 | 389,078 | 354,635 | 467,098 | ||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 484,266 | $ | 471,155 | $ | 606,878 | $ | 586,505 |
The accompanying notes are an integral part of these consolidated financial statements.
FutureFuel Corp.
Consolidated Statements of Operations and Comprehensive Income
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Revenue | $ | 65,332 | $ | 80,588 | $ | 182,830 | $ | 223,184 | $ | 52,372 | $ | 47,422 | ||||||||||||
Revenue – related parties | 352 | 834 | 2,219 | 2,321 | 710 | 1,079 | ||||||||||||||||||
Cost of goods sold | 54,037 | 61,559 | 155,603 | 146,916 | 32,781 | 40,065 | ||||||||||||||||||
Cost of goods sold – related parties | 4,455 | 5,651 | 12,314 | 15,682 | 2,215 | 3,796 | ||||||||||||||||||
Distribution | 1,687 | 1,512 | 5,006 | 4,329 | 1,640 | 1,325 | ||||||||||||||||||
Distribution – related parties | 43 | 47 | 132 | 147 | 47 | 53 | ||||||||||||||||||
Gross profit | 5,462 | 12,653 | 11,994 | 58,431 | 16,399 | 3,262 | ||||||||||||||||||
Selling, general, and administrative expenses | ||||||||||||||||||||||||
Compensation expense | 661 | 933 | 1,996 | 3,054 | 855 | 715 | ||||||||||||||||||
Other expense | 561 | 476 | 1,609 | 1,482 | 582 | 501 | ||||||||||||||||||
Related party expense | 132 | 138 | 391 | 416 | 148 | 129 | ||||||||||||||||||
Research and development expenses | 833 | 877 | 2,327 | 2,843 | 835 | 706 | ||||||||||||||||||
Total operating expenses | 2,187 | 2,424 | 6,323 | 7,795 | 2,420 | 2,051 | ||||||||||||||||||
Income from operations | 3,275 | 10,229 | 5,671 | 50,636 | 13,979 | 1,211 | ||||||||||||||||||
Interest and dividend income | 2,718 | 2,543 | 7,830 | 6,688 | 1,967 | 2,362 | ||||||||||||||||||
Interest expense | (43 | ) | (43 | ) | (130 | ) | (129 | ) | (56 | ) | (43 | ) | ||||||||||||
Gain (loss) on marketable securities | 1,424 | 815 | 5,177 | (3,273 | ) | |||||||||||||||||||
Other income (expense) | 262 | (87 | ) | 149 | (264 | ) | ||||||||||||||||||
Other income | 4,361 | 3,228 | 13,026 | 3,022 | ||||||||||||||||||||
(Loss) gain on marketable securities | (10,059 | ) | 2,927 | |||||||||||||||||||||
Other (expense) income | (8,148 | ) | 5,246 | |||||||||||||||||||||
Income before taxes | 7,636 | 13,457 | 18,697 | 53,658 | 5,831 | 6,457 | ||||||||||||||||||
Income tax provision | 1,014 | 4,012 | 2,889 | 2,336 | ||||||||||||||||||||
Income tax (benefit) provision | (13,212 | ) | 958 | |||||||||||||||||||||
Net income | $ | 6,622 | $ | 9,445 | $ | 15,808 | $ | 51,322 | $ | 19,043 | $ | 5,499 | ||||||||||||
Earnings per common share | ||||||||||||||||||||||||
Basic | $ | 0.15 | $ | 0.22 | $ | 0.36 | $ | 1.17 | $ | 0.44 | $ | 0.13 | ||||||||||||
Diluted | $ | 0.15 | $ | 0.22 | $ | 0.36 | $ | 1.17 | $ | 0.44 | $ | 0.13 | ||||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||||
Basic | 43,743,243 | 43,724,195 | 43,743,243 | 43,719,215 | 43,743,243 | 43,743,243 | ||||||||||||||||||
Diluted | 43,743,243 | 43,732,920 | 43,745,153 | 43,725,370 | 43,743,243 | 43,748,974 | ||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||
Net income | $ | 6,622 | $ | 9,445 | $ | 15,808 | $ | 51,322 | $ | 19,043 | $ | 5,499 | ||||||||||||
Other comprehensive income (loss) from unrealized net gains (losses) on available-for-sale debt securities | 1 | (27 | ) | 279 | (46 | ) | ||||||||||||||||||
Other comprehensive (loss) income from unrealized net (loss) gain on available-for-sale debt securities | (397 | ) | 256 | |||||||||||||||||||||
Income tax effect | - | 6 | (59 | ) | 10 | 84 | (54 | ) | ||||||||||||||||
Total unrealized gains (losses), net of tax | 1 | (21 | ) | 220 | (36 | ) | ||||||||||||||||||
Total other comprehensive (loss) income, net of tax | (313 | ) | 202 | |||||||||||||||||||||
Comprehensive income | $ | 6,623 | $ | 9,424 | $ | 16,028 | $ | 51,286 | $ | 18,730 | $ | 5,701 |
The accompanying notes are an integral part of these consolidated financial statements.
FutureFuel Corp.
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands)
(Unaudited)
For the Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | Additional | Total | ||||||||||||||||||||||
Common Stock | Comprehensive | paid-in | Retained | Stockholders’ | ||||||||||||||||||||
Shares | Amount | Income | Capital | Earnings | Equity | |||||||||||||||||||
Balance - December 31, 2018 | 43,743,243 | $ | 4 | $ | (20 | ) | $ | 282,145 | $ | 106,949 | $ | 389,078 | ||||||||||||
Other comprehensive income | - | - | 202 | - | - | 202 | ||||||||||||||||||
Net income | - | - | - | - | 5,499 | 5,499 | ||||||||||||||||||
Balance - March 31, 2019 | 43,743,243 | $ | 4 | $ | 182 | $ | 282,145 | $ | 112,448 | $ | 394,779 | |||||||||||||
Other comprehensive income | - | - | 17 | - | - | 17 | ||||||||||||||||||
Net income | - | - | - | - | 3,687 | 3,687 | ||||||||||||||||||
Balance - June 30, 2019 | 43,743,243 | $ | 4 | $ | 199 | $ | 282,145 | $ | 116,135 | $ | 398,483 | |||||||||||||
Stock based compensation, net of tax | - | - | - | 21 | - | 21 | ||||||||||||||||||
Other comprehensive income | - | - | 1 | - | - | 1 | ||||||||||||||||||
Net income | - | - | - | - | 6,622 | 6,622 | ||||||||||||||||||
Balance - September 30, 2019 | 43,743,243 | $ | 4 | $ | 200 | $ | 282,166 | $ | 122,757 | $ | 405,127 |
For the Three Months Ended March 31, 2020 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | Additional | Total | ||||||||||||||||||||||
Common Stock | Comprehensive | paid-in | Retained | Stockholders’ | ||||||||||||||||||||
Shares | Amount | Income (Loss) | Capital | Earnings | Equity | |||||||||||||||||||
Balance - December 31, 2019 | 43,743,243 | $ | 4 | $ | 296 | $ | 282,166 | $ | 184,632 | $ | 467,098 | |||||||||||||
Prior period adjustment: change in accounting principle | - | - | - | - | (12 | ) | (12 | ) | ||||||||||||||||
Balance - January 1, 2020, As adjusted | 43,743,243 | $ | 4 | $ | 296 | $ | 282,166 | $ | 184,620 | $ | 467,086 | |||||||||||||
Cash dividends declared, $3.00 per share | - | - | - | - | (131,230 | ) | (131,230 | ) | ||||||||||||||||
Stock based compensation | - | - | - | 49 | - | 49 | ||||||||||||||||||
Other comprehensive loss | - | - | (313 | ) | - | - | (313 | ) | ||||||||||||||||
Net income | - | - | - | - | 19,043 | 19,043 | ||||||||||||||||||
Balance - March 31, 2020 | 43,743,243 | $ | 4 | $ | (17 | ) | $ | 282,215 | $ | 72,433 | $ | 354,635 |
For the Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | Additional | Total | ||||||||||||||||||||||
Common Stock | Comprehensive | paid-in | Retained | Stockholders’ | ||||||||||||||||||||
Shares | Amount | Income | Capital | Earnings | Equity | |||||||||||||||||||
Balance - December 31, 2017 - As previously reported | 43,741,670 | $ | 4 | $ | 8,433 | $ | 281,964 | $ | 61,195 | $ | 351,596 | |||||||||||||
Prior period adjustment: Change in accounting principles | - | - | (8,273 | ) | - | 3,094 | (5,179 | ) | ||||||||||||||||
Balance - January 1, 2018 - As adjusted | 43,741,670 | $ | 4 | $ | 160 | $ | 281,964 | $ | 64,289 | $ | 346,417 | |||||||||||||
Stock based compensation, net of tax | - | - | - | 107 | - | 107 | ||||||||||||||||||
Other comprehensive loss | - | - | (58 | ) | - | - | (58 | ) | ||||||||||||||||
Net income | - | - | - | - | 35,826 | 35,826 | ||||||||||||||||||
Balance - March 31, 2018 | 43,741,670 | $ | 4 | $ | 102 | $ | 282,071 | $ | 100,115 | $ | 382,292 | |||||||||||||
Stock based compensation, net of tax | 1,007 | - | - | 107 | - | 107 | ||||||||||||||||||
Other comprehensive income | - | - | 43 | - | - | 43 | ||||||||||||||||||
Net income | - | - | - | - | 6,051 | 6,051 | ||||||||||||||||||
Balance - June 30, 2018 | 43,742,677 | $ | 4 | $ | 145 | $ | 282,178 | $ | 106,166 | $ | 388,493 | |||||||||||||
Stock based compensation, net of tax | 566 | - | - | (69 | ) | - | (69 | ) | ||||||||||||||||
Other comprehensive loss | - | - | (21 | ) | - | - | (21 | ) | ||||||||||||||||
Net income | - | - | - | - | 9,445 | 9,445 | ||||||||||||||||||
Balance - September 30, 2018 | 43,743,243 | $ | 4 | $ | 124 | $ | 282,109 | $ | 115,611 | $ | 397,848 |
For the Three Months Ended March 31, 2019 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | Additional | Total | ||||||||||||||||||||||
Common Stock | Comprehensive | paid-in | Retained | Stockholders’ | ||||||||||||||||||||
Shares | Amount | Income (Loss) | Capital | Earnings | Equity | |||||||||||||||||||
Balance - December 31, 2018 | 43,743,243 | $ | 4 | $ | (20 | ) | $ | 282,145 | $ | 106,949 | $ | 389,078 | ||||||||||||
Other comprehensive income | - | - | 202 | - | - | 202 | ||||||||||||||||||
Net income | - | - | - | - | 5,499 | 5,499 | ||||||||||||||||||
Balance - March 31, 2019 | 43,743,243 | $ | 4 | $ | 182 | $ | 282,145 | $ | 112,448 | $ | 394,779 |
The accompanying notes are an integral part of these consolidated financial statements.
FutureFuel Corp.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 15,808 | $ | 51,322 | $ | 19,043 | $ | 5,499 | ||||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||||||
Depreciation | 9,092 | 8,502 | 3,004 | 2,725 | ||||||||||||
Amortization of deferred financing costs | 108 | 108 | 36 | 36 | ||||||||||||
Benefit for deferred income taxes | (273 | ) | (3,609 | ) | (22 | ) | (415 | ) | ||||||||
Change in fair value of equity securities | (6,621 | ) | 5,597 | 9,570 | (3,008 | ) | ||||||||||
Change in fair value of derivative instruments | (357 | ) | (2,290 | ) | (1,874 | ) | (286 | ) | ||||||||
Loss (gain) on the sale of investments | 1,444 | (2,324 | ) | |||||||||||||
Loss on the sale of investments | 489 | 80 | ||||||||||||||
Stock based compensation | 21 | 321 | 49 | - | ||||||||||||
(Gain) loss on disposal of property and equipment | (11 | ) | 41 | |||||||||||||
Loss on disposal of property and equipment | 2 | 3 | ||||||||||||||
Noncash interest expense | 22 | 22 | 19 | 7 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (4,526 | ) | 3,031 | (17,803 | ) | (1,320 | ) | |||||||||
Accounts receivable – related parties | 1,822 | (2,382 | ) | 4,175 | 1,720 | |||||||||||
Inventory | (3,493 | ) | (4,251 | ) | (3,878 | ) | (13,926 | ) | ||||||||
Income tax receivable | 6,491 | 6,458 | (13,587 | ) | 1,340 | |||||||||||
Prepaid expenses | 1,257 | 1,190 | 171 | 384 | ||||||||||||
Other assets | 221 | (247 | ) | 120 | 36 | |||||||||||
Accounts payable | 5,951 | 13,018 | 2,360 | 3,634 | ||||||||||||
Accounts payable – related parties | (717 | ) | 1,949 | (815 | ) | (619 | ) | |||||||||
Accrued expenses and other current liabilities | 1,904 | 5,385 | 2,192 | 807 | ||||||||||||
Accrued expenses and other current liabilities – related parties | (64 | ) | - | |||||||||||||
Deferred revenue | (274 | ) | (2,672 | ) | 925 | 31 | ||||||||||
Other noncurrent liabilities | (3,511 | ) | - | (78 | ) | (17 | ) | |||||||||
Net cash provided by operating activities | 24,358 | 79,169 | ||||||||||||||
Net cash provided by (used in) operating activities | 4,034 | (3,289 | ) | |||||||||||||
Cash flows from investing activities | ||||||||||||||||
Collateralization of derivative instruments | 852 | 2,384 | 1,876 | 590 | ||||||||||||
Purchase of marketable securities | (19,200 | ) | (19,664 | ) | (964 | ) | (9,096 | ) | ||||||||
Proceeds from the sale of marketable securities | 28,962 | 33,942 | 4,484 | 7,709 | ||||||||||||
Proceeds from the sale of property and equipment | 13 | 22 | 50 | 5 | ||||||||||||
Capital expenditures | (6,139 | ) | (3,084 | ) | (1,608 | ) | (2,246 | ) | ||||||||
Net cash provided by investing activities | 4,488 | 13,600 | ||||||||||||||
Net cash provided by (used in) investing activities | 3,838 | (3,038 | ) | |||||||||||||
Cash flows from financing activities | ||||||||||||||||
Minimum tax withholding on stock options exercised and awards vested | - | (176 | ) | |||||||||||||
Deferred financing costs | (477 | ) | - | |||||||||||||
Payment of dividends | (7,873 | ) | (7,872 | ) | (2,624 | ) | (2,624 | ) | ||||||||
Net cash used in financing activities | (7,873 | ) | (8,048 | ) | (3,101 | ) | (2,624 | ) | ||||||||
Net change in cash and cash equivalents | 20,973 | 84,721 | 4,771 | (8,951 | ) | |||||||||||
Cash and cash equivalents at beginning of period | 214,972 | 114,627 | 243,331 | 214,972 | ||||||||||||
Cash and cash equivalents at end of period | $ | 235,945 | $ | 199,348 | $ | 248,102 | $ | 206,021 | ||||||||
Cash paid for interest | $ | - | $ | - | $ | 1 | $ | - | ||||||||
Cash paid for income taxes | $ | 1,076 | $ | 1,506 | $ | 453 | $ | 3 | ||||||||
Noncash investing and financing activities: | ||||||||||||||||
Cash dividends declared, not paid | $ | 131,230 | $ | - | ||||||||||||
Noncash capital expenditures | $ | 42 | $ | - | $ | - | $ | 210 | ||||||||
Noncash operating leases | $ | 432 | $ | - | $ | - | $ | 432 |
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
1) | NATURE OF OPERATIONS AND BASIS OF PRESENTATION |
Organization
FutureFuel Corp. (“FutureFuel” or “the Company”), through its wholly-owned subsidiary, FutureFuel Chemical Company (“FutureFuel Chemical”), owns and operates a chemical production facility located on approximately 2,200 acres of land six miles southeast of Batesville in north central Arkansas fronting the White River (the “Batesville Plant”). FutureFuel Chemical manufactures diversified chemical products, biobased products comprisedcomposed of biofuels, and biobased specialty chemical products. FutureFuel Chemical’s operations are reported in two segments: chemicals and biofuels.
The chemical segment manufactures a diversified portfolio of chemical products that are sold to third party customers. The majority of the revenues from the chemical segment are derived from the custom manufacturing of specialty chemicals for specific customers.
The biofuels segment primarily produces and sells biodiesel. FutureFuel Chemical also sells petrodiesel in blends with the Company’s biodiesel and, from time to time, with no biodiesel added. FutureFuel Chemical is a shipper of refined petroleum products on common carrier pipelines and buys and sells petroleum products to maintain an active shipper status on these pipelines.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by FutureFuel in accordance and consistent with the accounting policies stated in FutureFuel’s 20182019 audited consolidated financial statements and should be read in conjunction with the 20182019 audited consolidated financial statements of FutureFuel. Certain reclassifications were made to prior year amounts to conform to the 2019 presentation.
In the opinion of FutureFuel, all normal recurring adjustments necessary for a fair presentation have been included in the unaudited consolidated financial statements. The unaudited consolidated financial statements have been prepared in compliance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly the unaudited consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements, and do include amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. Certain reclassifications were made to prior period amounts to conform to the 2020 presentation. The unaudited consolidated financial statements include assets, liabilities, revenues, and expenses of FutureFuel and its direct and indirect wholly owned subsidiaries; namely, FutureFuel Chemical Company,Company; FFC Grain, L.L.C.,; FutureFuel Warehouse Company, L.L.C.,; and Legacy Regional Transport, L.L.C. Intercompany transactions and balances have been eliminated in consolidation.
2) | REINSTATEMENT OF THE BIODIESEL BLENDERS’ TAX CREDIT AND SMALL AGRI-BIODIESEL PRODUCER TAX CREDIT |
The biodiesel Blenders’ Tax Credit (“BTC”) provides a $1.00one dollar per gallon tax credit to the blender of biomass-based diesel with at least 0.1% petroleum-based diesel fuel. When
The Further Consolidated Appropriations Act of 2020 was passed by Congress and signed into law on December 20, 2019, retroactively reinstating the BTC for 2018 and 2019 and extending it through December 31, 2022. As this act was passed into law in effect, FutureFuel is2019, the blenderCompany recognized its impact in the last quarter of record2019 for both periods (2018 and recognizes2019) within the Company’s 2019 financial results. The Company records the credit as a reduction to cost of goods sold. The BTC expired on December 31, 2016 and was not reinstated for 2017 until it was signed into law as part
NotestoConsolidatedFinancialStatementsof The Bipartisan Budget Act of 2018 passed by Congress on February 9, 2018. As this Act was passed into law FutureFuelCorp.
(Dollarsin 2018, FutureFuel recognized a net estimated pretax benefit from the reinstatement in the biofuels segment of $28,865 (a reduction in revenue of $13,559 for customer rebates (“BTC Rebates”) upon reinstatement and a reduction in cost of goods sold of $42,424). The gallons related to this credit were sold in the twelve months ended December 31, 2017.thousands,exceptpershareamounts)
(Unaudited)
As part of the law from which the BTC mentioned above was reinstated, small agri-biodiesel producers with production capacity not in excess of 60 million gallons were eligible for an additional tax credit of $0.10 per gallon on the first 15 million gallons of agri-biodiesel sold (the “Small Agri-biodiesel Producer Tax Credit”). The benefit of the Small Agri-biodiesel Producer Tax CreditCompany was eligible for this credit and recognized as a $1,500its benefit in the income tax provision in the nine-month period ended September 30, 2018.
Neither the BTC nor the Small Agri-biodiesel Producer Tax Credit have been passed into law for gallons blended and sold in 2018 or 2019.
NotestoConsolidatedFinancialStatementslast quarter ofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
2019 as described above.
| REVENUE RECOGNITION |
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 customer contract 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 revenueFor certain contracts, this occurs upon the transfer of title and risk of loss, generally upon shipment or delivery of goods, although some revenue was recognized onthe material to a bill-and-hold basis.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 2 to 10 days for biofuels segment customers.
A select number
Certain of FutureFuel custom chemical contracts within the chemical segment contain a material right as defined by Topic 606, from the provision of a customer option to purchase future goods or services at a discounted price 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. If the customer is deemed to take control of the inventory prior to pick up, the Company recognizes the revenue as a bill-and-hold transaction in accordance with Topic 606. FutureFuel has appliedapplies 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 estimatedestimates 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 the Company’s 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 per the customer contract and title and risk of loss are transferred. This typically occurs at the time of shipment or delivery; or 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 biofuels segment customers.
Contract Assets and Liabilities:
Contract assets consist of unbilled amounts typically resulting from amounts related to FutureFuel’s contractual right to consideration for completed performance obligations not yet invoiced. Contractrevenue recognized through bill-and-hold arrangements. The contract assets at March 31, 2020 and December 31, 2019 consist of unbilled revenue from one customer and are recorded as accounts receivable onin the consolidated balance sheet.sheets. Contract liabilities consist of upfront capitaladvance payments from a customerrelated to material right. The contract liabilities arerights recorded as deferred revenue in the consolidated balance sheetssheets. Increases to contract liabilities from cash received for a performance obligation of chemical segment plant expansions were $2,307 and $1,438 for the three months ended March 31, 2020 and 2019, respectively. Contract liabilities are reduced as FutureFuelthe Company transfers product to the customer under the renewal option approach. “Contract liabilities – short-term” primarily reflects deferred revenueRevenue recognized in the chemical segment from prepayments from customers for product to be deliveredthe contract liability reductions were $1,327 and $1,351 in 12the three months or less. “Contract liabilities – long-term” includes advance payments that FutureFuel has received from customers related to long-term supply contracts that are deferredended March 31, 2020 and recognized over the life of the contract.
2019, respectively. These contract assetsasset and liabilitiesliability balances are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
The following table provides information aboutthe balances of receivables, contract assets, and contract liabilities from contracts with customers.
Contract Assets and Liability Balances | September 30, 2019 | December 31, 2018 | ||||||
Trade receivables, which are included in Accounts receivable, net of allowances for bad debts of $0 | $ | 20,045 | $ | 15,496 | ||||
Contract assets | $ | 775 | $ | 798 | ||||
Contract liabilities, which are included in Deferred revenue - short-term | $ | 5,025 | $ | 4,374 | ||||
Contract liabilities, which are included in Deferred revenue - long-term | $ | 15,199 | $ | 15,958 |
Contract Assets and Liability Balances | March 31, 2020 | December 31, 2019 | ||||||
Trade receivables, included in accounts receivable* | $ | 18,974 | $ | 11,902 | ||||
Contract assets, included in accounts receivable | $ | 515 | $ | 1,067 | ||||
Contract liabilities, included in deferred revenue - short-term | $ | 3,886 | $ | 5,030 | ||||
Contract liabilities, included in deferred revenue - long-term | $ | 19,276 | $ | 17,151 |
The increase in contract liabilities from December 31, 2018 to September 30, 2019 was $3,402 of advanced payments from customers related to long-term supply agreements. Revenue recognized in the first nine months of 2019 from amounts included in contract liabilities at the beginning*Exclusive of the period was $3,510.
BTC of $108,599 and $97,295, respectively, and net of allowances for bad debt of $33 and $0, respectively, as of the dates noted.
Transaction price allocated to the remaining performance obligations:
At September 30, 2019,March 31, 2020, approximately $20,224$23,162 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 25%17% of this revenue is expected to be recognized over the next 12 months, and 75%83% is expected to be recognized between one and five 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.
The Company appliedapplies the practical expedient in ASC 606-10-50-14 and have excludedexcludes the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
NotestoConsolidatedFinancialStatementsThe following tables provide revenue from customers disaggregated by the type ofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited) arrangement and by the timing of the recognized revenue.
Disaggregation of revenue - contractual and non-contractual:
Three months ended September 30, | Nine months ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Contract revenue from customers with > 1 year arrangements | $ | 16,331 | $ | 14,587 | $ | 43,470 | $ | 47,745 | $ | 15,603 | $ | 15,418 | ||||||||||||
Contract revenue from customer with < 1 year arrangements | 49,298 | 66,780 | 141,413 | 191,154 | ||||||||||||||||||||
Contract revenue from customers with < 1 year arrangements | 39,440 | 33,028 | ||||||||||||||||||||||
Revenue from non-contractual arrangements | 55 | 55 | 166 | 165 | 56 | 55 | ||||||||||||||||||
BTC rebate | - | - | - | (13,559 | ) | (2,017 | ) | - | ||||||||||||||||
Total revenue | $ | 65,684 | $ | 81,422 | $ | 185,049 | $ | 225,505 | $ | 53,082 | $ | 48,501 |
Timing of revenue:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Bill-and-hold revenue | $ | 14,417 | $ | 11,576 | $ | 38,179 | $ | 32,470 | ||||||||
Non-bill-and-hold revenue | 51,267 | 69,846 | 146,870 | 193,035 | ||||||||||||
Total revenue | $ | 65,684 | $ | 81,422 | $ | 185,049 | $ | 225,505 |
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.
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The FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments under the leases.
The Company adopted the new lease standard January 1, 2019 under the modified retrospective transition approach using the effective date as the date of initial application with the practical expedient election for short-term lease exemption along with the election to not separate lease and non-lease components for all leases.
FutureFuel leases railcars under multi-year arrangements primarily for delivery of feedstock and biodiesel within its biofuels segment. The lease fees are fixed, with no option to purchase and no upfront fees nor residual value guarantees. All railcar leases are direct and no subleases exist. FutureFuel determines lease existence and classification at inception when an agreement conveys the right to control identified property for a period of time in exchange for consideration. The Company’s leases have remaining terms from two to five years with a weighted average remaining term of four years. As operating leases do not provide a readily determinable implicit interest rate, the Company uses an incremental borrowing rate based on information available at the commencement date in determining present value of the lease payments. On January 1, 2019, an ROU asset and ROU liability was reported as other noncurrent assets of $1,641 and other current liabilities and other noncurrent liabilities of $370 and $1,271, respectively.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
Following are supplemental income statement and cash flow information related to leases at September 30, 2019.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Operating lease expense | $ | 149 | $ | 135 | $ | 427 | $ | 405 | ||||||||
Short-term lease expense | $ | 73 | $ | - | $ | 165 | $ | - | ||||||||
Cash paid for operating leases | $ | 149 | $ | 135 | $ | 427 | $ | 405 | ||||||||
ROU assets obtained in exchange for lease obligations | $ | - | $ | - | $ | 432 | $ | - | ||||||||
Weighted average discount rate | 4.4% per annum | N/A | 4.4% per annum | N/A |
Following are supplemental balance sheet information related to leases at September 30, 2019.
Operating lease ROU assets: | ||||
Other noncurrent assets | $ | 1,688 | ||
Total operating lease assets | $ | 1,688 | ||
Operating lease liabilities: | ||||
Other current liabilities | $ | 531 | ||
Other noncurrent liabilities | 1,157 | |||
Total operating lease liabilities | $ | 1,688 |
Following are maturities of lease liabilities at September 30, 2019.
2019 | $ | 130 | ||
2020 | 595 | |||
2021 | 388 | |||
2022 | 370 | |||
2023 | 319 | |||
2024 | 32 | |||
Total | $ | 1,834 | ||
Less: imputed interest | 146 | |||
Present value of lease payments | $ | 1,688 |
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The carrying values of inventory were as follows as of:
September 30, 2019 | December 31, 2018 | |||||||
At average cost (approximates current cost) | ||||||||
Finished goods | $ | 18,283 | $ | 23,658 | ||||
Work in process | 1,480 | 2,100 | ||||||
Raw materials and supplies | 30,917 | 23,909 | ||||||
50,680 | 49,667 | |||||||
LIFO reserve | (7,891 | ) | (10,371 | ) | ||||
Total inventory | $ | 42,789 | $ | 39,296 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Bill-and-hold revenue | $ | 10,153 | $ | 11,756 | ||||
Non-bill-and-hold revenue | 42,929 | 36,745 | ||||||
Total revenue | $ | 53,082 | $ | 48,501 |
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
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FutureFuel is exposed to certain risks relating to its ongoing business operations. Commodity price risk is the primary risk managed by using derivative instruments. Regulated fixed price futures and options contracts are utilized to manage the price risk associated with future purchases of feedstock used in FutureFuel’s biodiesel production along with physical feedstock and finished product inventories attributed to this process.
FutureFuel recognizes all derivative instruments as either assets or liabilities at fair value in its consolidated balance sheets. FutureFuel’s derivative instruments do not qualify for hedge accounting under the specific guidelines of ASC 815-20-25, Derivatives and Hedging. None of the derivative instruments are designated and accounted for as hedges primarily as a result of the extensive record keeping requirements.
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 statements of operations as a component of cost of goods sold, and amounted to a gain of $322 for the three months ended September 30, 2019 and a loss of $676 for the three months ended September 30, 2018, and a loss of $711 and $3,947 for the nine months ended September 30, 2019 and 2018, respectively.
The volumes and carrying values of FutureFuel’s derivative instruments were as follows at:
September 30, 2019 | December 31, 2018 | |||||||||||||||
Contract Quantity Short | Fair Value | Contract Quantity Short | Fair Value | |||||||||||||
Regulated options | - | $ | - | 100 | $ | (484 | ) | |||||||||
Regulated fixed price future commitments | 10 | $ | 60 | 96 | $ | 187 |
The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $128 and $980 at September 30, 2019 and December 31, 2018, respectively, and was classified as other current assets in the consolidated balance sheets. The carrying values of the margin account and of the derivative instruments are included net, in other current assets.
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At September 30, 2019 and December 31, 2018, FutureFuel had investments in certain debt securities (trust preferred securities and exchange-traded debt instruments) and in preferred stock and other equity instruments. These investments are classified as current assets in the consolidated balance sheets. FutureFuel has designated the debt securities as being available-for-sale. For the nine months ended September 30, 2019 and 2018, the change in the fair value of equity securities was reported as gain (loss) on marketable securities as a component of net income.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
AVAILABLE-FOR-SALE DEBT SECURITIES:
The following comprises the available-for-sale debt securities balances included within marketable securities in the consolidated balance sheets at the respective dates:
September 30, 2019 | ||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Exchange-traded debt | $ | 1,428 | $ | 112 | $ | (5 | ) | $ | 1,535 | |||||||
Trust preferred stock | 3,676 | 147 | - | 3,823 | ||||||||||||
Total debt securities | $ | 5,104 | $ | 259 | $ | (5 | ) | $ | 5,358 |
December 31, 2018 | ||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Exchange-traded debt | $ | 1,428 | $ | 37 | $ | (65 | ) | $ | 1,400 | |||||||
Trust preferred stock | 3,147 | 21 | (18 | ) | 3,150 | |||||||||||
Total debt securities | $ | 4,575 | $ | 58 | $ | (83 | ) | $ | 4,550 |
The aggregate fair value of debt securities with unrealized losses totaled $256 at September 30, 2019, and the aggregate fair value of debt securities with unrealized losses totaled $2,540 at December 31, 2018. FutureFuel had investments in debt securities with a total value of $256 and $187 that were in an unrealized loss position for a greater-than-12-month period at September 30, 2019 and December 31, 2018, respectively. The unrealized loss position for those securities was $5 and $19, respectively, at September 30, 2019 and December 31, 2018. These unrealized losses are interest rate related and therefore considered temporary. FutureFuel will hold these debt securities as they are fully expected to recover. Both unrealized and realized gains and losses are recognized on the specific identification method. There were no sales of debt securities in 2019 or 2018.
The adjusted cost basis and fair value of debt securities at September 30, 2019, by contractual maturity, are shown below.
September 30, 2019 | ||||||||
Adjusted Cost | Fair Value | |||||||
Due in one year or less | $ | - | $ | - | ||||
Due after one year through five years | - | - | ||||||
Due after five years through ten years | - | - | ||||||
Due after ten years | 5,104 | 5,358 | ||||||
Total | $ | 5,104 | $ | 5,358 |
The unrealized gain (loss) on equity securities held for the three and nine months ended September 30, 2019 were $1,730 and $6,621, respectively, and for the three- and nine- months ended September 2018, $815 and ($5,597), respectively.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
4) | INVENTORY |
The carrying values of inventory were as follows as of:
March 31, 2020 | December 31, 2019 | |||||||
At average cost (approximates current cost) | ||||||||
Finished goods | $ | 22,807 | $ | 22,564 | ||||
Work in process | 2,568 | 2,768 | ||||||
Raw materials and supplies | 22,637 | 20,121 | ||||||
48,012 | 45,453 | |||||||
LIFO reserve | (6,561 | ) | (7,880 | ) | ||||
Total inventory | $ | 41,451 | $ | 37,573 |
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The following tables summarizeCompany records all derivative instruments at fair value. Fair value is determined by using the closing prices of the derivative instruments on the New York Mercantile Exchange at the end of an accounting period. Changes in the fair value of derivative instruments are recognized at the end of each accounting period and recorded in the statement of income as a component of cost of goods sold.
In order to manage commodity price risk caused by market fluctuations in biofuel prices, future purchases of feedstock used in biodiesel production, physical feedstock, finished product inventories attributed to the process, and other petroleum products purchased or sold, the Company may enter into exchange-traded commodity futures and options contracts. The Company accounts for these derivative instruments in accordance with ASC 815-20-25, Derivatives and Hedging. Under this standard, the accounting for changes in accumulated other comprehensive income from unrealizedthe 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. The Company had no derivative instruments that qualified under these rules as designated accounting hedges in 2020 or 2019. The Company has elected the normal purchase and normal sales exception for certain feedstock purchase contracts and supply agreements.
Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the consolidated statements of operations as a component of cost of goods sold and amounted to a gain of $6,857 for the three months ended March 31, 2020 and a loss of $1,476 for the three months ended March 31, 2019.
The volumes and carrying values of FutureFuel’s derivative instruments were as follows at:
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 | ) |
The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of ($785) and $1,091 at March 31, 2020 and December 31, 2019, respectively, and was classified as other current assets in the consolidated balance sheets. The carrying values of the margin account and of the derivative instruments are included net, in other current assets.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
6) | MARKETABLE SECURITIES |
At March 31, 2020 and December 31, 2019, FutureFuel had investments in certain debt securities (trust preferred securities and exchange-traded debt instruments) and in preferred stock and other equity instruments. These investments are classified as current assets in the consolidated balance sheets. The unrealized (loss) gain on equity securities held for the three months ended March 31, 2020 and 2019 were ($9,570) and $3,008, respectively.
Available for sale securities:
FutureFuel has designated the debt securities as being available-for-sale. The following comprises the available-for-sale debt securities balances included within marketable securities in the three- and nine-months ended September 30, 2019 and 2018. consolidated balance sheets at the respective dates:
March 31, 2020 | ||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Trust preferred stock | $ | 3,676 | $ | - | $ | (51 | ) | $ | 3,625 | |||||||
Exchange-traded debt | 1,428 | 30 | - | 1,458 | ||||||||||||
Total debt securities | $ | 5,104 | $ | 30 | $ | (51 | ) | $ | 5,083 |
Changes in Accumulated Other Comprehensive Income From Unrealized | ||||||||
Gains and Losses on Available-for-Sale Securities | ||||||||
Three Months Ended September 30, 2019 and 2018 | ||||||||
(Net of Tax) | ||||||||
2019 | 2018 | |||||||
Balance at July 1 | $ | 199 | $ | 145 | ||||
Other comprehensive income before reclassifications | 1 | (21 | ) | |||||
Amounts reclassified from accumulated other comprehensive income | - | - | ||||||
Net current-period other comprehensive income | 1 | (21 | ) | |||||
Balance at September 30 | $ | 200 | $ | 124 |
December 31, 2019 | ||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Trust preferred stock | $ | 3,676 | $ | 250 | $ | - | $ | 3,926 | ||||||||
Exchange-traded debt | 1,428 | 128 | (3 | ) | 1,553 | |||||||||||
Total debt securities | $ | 5,104 | $ | 378 | $ | (3 | ) | $ | 5,479 |
Changes in Accumulated Other Comprehensive Income From Unrealized | ||||||||
Gains and Losses on Available-for-Sale Securities | ||||||||
Nine Months Ended September 30, 2019 and 2018 | ||||||||
(Net of Tax) | ||||||||
2019 | 2018 | |||||||
Balance at January 1 | $ | (20 | ) | $ | 160 | |||
Other comprehensive income before reclassifications | 220 | (36 | ) | |||||
Amounts reclassified from accumulated other comprehensive income | - | - | ||||||
Net current-period other comprehensive income | 220 | (36 | ) | |||||
Balance at September 30 | $ | 200 | $ | 124 |
The aggregate fair value of debt securities with unrealized losses totaled $3,625 at March 31, 2020 and $151 at December 31, 2019. Effective January 1, 2020 the Company adopted ASU 2016-13 using the modified retrospective approach. Under ASU 2016-13 the Company evaluates the debt securities for credit losses using the current expected credit loss model (“CECL”). At the date of adoption, the Company held no securities with a fair value below adjusted cost and no evaluation under the CECL model was required. At March 31, 2020, the Company held two trust preferred securities with large financial institutions that were in unrealized loss positions that mature October 30, 2040 and December 15, 2066. The Company determined an allowance for credit losses for these debt securities was not necessary as of March 31, 2020. The large financial institutions have strong credit ratings with no recent history of defaulting on outstanding obligations, nor is the Company aware of any long-term credit risk related to delinquency under these obligations.
There were no reclassifications from accumulated other comprehensive incomesales of debt securities in the three-three months ended March 31, 2020 or 2019.
The adjusted cost basis and nine-months ended September 30, 2019 and 2018. fair value of debt securities at March 31, 2020, by contractual maturity, are shown below.
March 31, 2020 | ||||||||
Adjusted Cost | Fair Value | |||||||
Due in one year or less | $ | - | $ | - | ||||
Due after one year through five years | - | - | ||||||
Due after five years through ten years | - | - | ||||||
Due after ten years | 5,104 | 5,083 | ||||||
Total | $ | 5,104 | $ | 5,083 |
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
| FAIR VALUE MEASUREMENTS |
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Fair value accounting pronouncements also include a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of FutureFuel. Unobservable inputs are inputs that reflect FutureFuel’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis, at September 30, 2019March 31, 2020 and December 31, 2018.2019.
Asset | Asset (Liability) | |||||||||||||||||||||||||||||||
Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||||||||||
Fair Value at | Inputs Considered as: | Fair Value at | Inputs Considered as: | |||||||||||||||||||||||||||||
Description | September 30, 2019 | Level 1 | Level 2 | Level 3 | March 31, 2020 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Derivative instruments | $ | 60 | $ | 60 | $ | - | $ | - | $ | 1,607 | $ | 1,607 | $ | - | $ | - | ||||||||||||||||
Preferred stock and other equity instruments | $ | 70,225 | $ | 70,225 | $ | - | $ | - | $ | 54,561 | $ | 54,561 | $ | - | $ | - | ||||||||||||||||
Trust preferred stock and exchange-traded debt instruments | $ | 5,358 | $ | 5,358 | $ | - | $ | - | $ | 5,083 | $ | 5,083 | $ | - | $ | - |
Asset (Liability) | Asset (Liability) | |||||||||||||||||||||||||||||||
Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||||||||||
Fair Value at | Inputs Considered as: | Fair Value at | Inputs Considered as: | |||||||||||||||||||||||||||||
Description | December 31, 2018 | Level 1 | Level 2 | Level 3 | December 31, 2019 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Derivative instruments | $ | (297 | ) | $ | (297 | ) | $ | - | $ | - | $ | (267 | ) | $ | (267 | ) | $ | - | $ | - | ||||||||||||
Preferred stock and other equity instruments | $ | 75,338 | $ | 75,338 | $ | - | $ | - | $ | 68,141 | $ | 68,141 | $ | - | $ | - | ||||||||||||||||
Trust preferred stock and exchange-traded debt instruments, | $ | 4,550 | $ | 4,550 | $ | - | $ | - | ||||||||||||||||||||||||
Trust preferred stock and exchange-traded debt instruments | $ | 5,479 | $ | 5,479 | $ | - | $ | - |
| INTANGIBLE ASSETS |
In April of 2015, FutureFuel acquired additional historical line space on a pipeline for $1,408. The acquired line space was recorded as an intangible asset with an indefinite life as there was no foreseeable limit on the time period over which it is expected to contribute to cash flows. The carrying value of the asset was $1,408 at September 30, 2019March 31, 2020 and December 31, 2018.2019 FutureFuel tests the intangible asset for impairment in accordance with Topic 350, Intangibles-Goodwill and Other.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
| ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities including those associated with related parties, consisted of the following at:
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
Accrued employee liabilities | $ | 2,533 | $ | 1,253 | $ | 3,404 | $ | 2,534 | ||||||||
Accrued property, franchise, motor fuel and other taxes | 1,860 | 1,225 | 2,477 | 1,226 | ||||||||||||
Lease liability, current | 531 | - | 484 | 537 | ||||||||||||
Other | 303 | 264 | 237 | 113 | ||||||||||||
Total | $ | 5,227 | $ | 2,742 | $ | 6,602 | $ | 4,410 |
| BORROWINGS |
On April 16, 2015,March 30, 2020, FutureFuel, with FutureFuel Chemical as the borrower and certain of FutureFuel’s other subsidiaries as guarantors, amended and restated its credit agreement (the “Credit Agreement”) originally entered into a $150,000 secured and committed credit facilityon April 16, 2015 (as amended, the “Prior Credit Agreement”) with the lenders party, Regions Bank as administrative agent and collateral agent, and PNC Bank, N.A., as syndication agent. On May 25, 2016, FutureFuel increased the credit facility by $15,000. The credit facilityCredit Agreement consists of a five-year revolving credit facility in a dollar amount of up to $165,000,$100,000, which includes a sublimit of $30,000 for letters of credit and $15,000 for swingline loans (collectively, the “Credit Facility”). The credit facility expires on April 16, 2020.March 30, 2025. The primary amendments from the Prior Credit Agreement were a reduction in the facility by $65,000, a reduction in the facility’s applicable interest rate by 0.25%, a reduction in the commitment fee, and elimination of the minimum consolidated fixed charge coverage ratio.
The interest rate floats at the following margins over LIBOR or base rate based upon the leverage ratio from time to time:
Consolidated Leverage Ratio | Consolidated Leverage Ratio | Adjusted LIBOR Rate Loans and Letter of Credit Fee | Base Rate Loans | Commitment Fee | Consolidated Leverage Ratio | Adjusted LIBOR Rate Loans and Letter of Credit Fee | Base Rate Loans | Commitment Fee | |||||||||||||||||||||||
< 1.00:1.0 | < 1.00:1.0 | 1.25 | % | 0.25 | % | 0.15 | % |
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| 1.00% | 0.00% | 0.15% | |||||||||||||||||||
≥ 1.00:1.0 | And | < 1.50:1.0 | 1.50 | % | 0.50 | % | 0.20 | % | And | < 1.50:1.0 | 1.25% | 0.25% | 0.15% | ||||||||||||||||||
≥ 1.50:1.0 | And | < 2.00:1.0 | 1.75 | % | 0.75 | % | 0.25 | % | And | < 2.00:1.0 | 1.50% | 0.50% | 0.20% | ||||||||||||||||||
≥ 2.00:1.0 | And | < 2.50:1.0 | 2.00 | % | 1.00 | % | 0.30 | % | And | < 2.50:1.0 | 1.75% | 0.75% | 0.20% | ||||||||||||||||||
≥ 2.50:1.0 | ≥ 2.50:1.0 | 2.25 | % | 1.25 | % | 0.35 | % |
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| 2.00% | 1.00% | 0.25% |
The terms of the Credit Facility contain certain negative covenants and conditions including a maximum consolidated leverage ratio a minimum consolidated fixed charge coverage ratio, and a consolidated minimum liquidity requirement. FutureFuel was in compliance with such covenants at September 30, 2019.interest coverage ratio.
There were no borrowings under this credit agreementthe Credit Agreement at September 30, 2019March 31, 2020 or the Prior Credit Agreement at December 31, 2018.2019.
11) | INCOME TAX PROVISION |
The following table summarizes the income tax provision.
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Income tax (benefit) provision | $ | (13,212 | ) | $ | 958 | |||
Effective tax rate | (226.6 | %) | 14.8 | % |
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
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From timeThe effective tax rate for the three months ended March 31, 2020 reflects the positive effect of the reinstatement of certain tax credits and incentives for 2020, the most significant of which was the BTC and Small Agri-biodiesel Producer Tax Credit. The BTC and Small Producer Agri-biodiesel Producer Credit were retroactively extended for 2018 and 2019 on December 20, 2019 and further extended through December 31, 2022. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“CARES Act”). The CARES Act provides that Net Operating Losses (“NOLs”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 shall be treated as a carryback to time,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 March 31, 2019 reflects the unfavorable effect of the BTC and its operations are parties to, or targets of, lawsuits, claims, investigations, regulatory matters, and proceedings, which areSmall Producer Agri-biodiesel Producer Credit not being handled and defended in the ordinary courselaw for the first quarter of business. While2019. This rate was also favorably impacted from a retroactive research and development credit for 2018 in a state where FutureFuel is unable to predict the outcomes of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.significant business.
There were no unrecognized tax benefits at March 31, 2020 or December 31, 2019.
FutureFuel recorded interest and penalties, net, as a component of income tax provision and had accrued balances of ($3) and ($557) at March 31, 2020 and December 31, 2019, respectively.
1 | EARNINGS PER SHARE |
In the three months ended March 31, 2020 and 2019, FutureFuel used the treasury method in computing earnings per share.
Basic and diluted earnings per common share were computed as follows:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Numerator: | ||||||||
Net income | $ | 19,043 | $ | 5,499 | ||||
Denominator: | ||||||||
Weighted average shares outstanding – basic | 43,743,243 | 43,743,243 | ||||||
Effect of dilutive securities: | ||||||||
Stock options and other awards | 0 | 5,731 | ||||||
Weighted average shares outstanding – diluted | 43,743,243 | 43,748,974 | ||||||
Basic earnings per share | $ | 0.44 | $ | 0.13 | ||||
Diluted earnings per share | $ | 0.44 | $ | 0.13 |
No options to purchase FutureFuel’s common stock were excluded in the computation of diluted earnings per share as none were anti-dilutive in the three months ended March 31, 2020 and 2019.
13) | RELATED PARTY TRANSACTIONS |
FutureFuel enters into transactions with companies affiliated with or controlled by a director and significant shareholder. Revenues, expenses, prepaid amounts, and unpaid amounts related to these transactions are captured in the accompanying consolidated financial statements as related party line items.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
Related party revenues are the result of sales of biodiesel, petrodiesel, blends, other petroleum products, and other similar or related products to these related parties.
Related party cost of goods sold and distribution are the result of sales of biodiesel, petrodiesel, blends, and other petroleum products to these related parties along with the associated expense from the purchase of natural gas, storage and terminalling services and income tax and consulting services by FutureFuel from these related parties.
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The following table summarizes the income tax provision.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Income tax provision | $ | 1,014 | $ | 4,012 | $ | 2,889 | $ | 2,336 | ||||||||
Effective tax rate | 13.3 | % | 29.8 | % | 15.5 | % | 4.4 | % |
The effective tax rate for the three-and nine-months ended September 30, 2019 included a benefit from the 2014, 2015, and 2016 income tax audit settlements with the Internal Revenue Service (IRS) and a return to provision true-up. The effective tax rate for the nine months ended September 30, 2019 was also favorably impacted from a retroactive research and development credit for a prior year in a state where FutureFuel does significant business.
Comparatively, the effective tax rate for the nine months ended September 30, 2018 reflected the expected tax rate on reported operating income before income tax, including the positive effect of the retroactive reinstatement of the 2017 BTC and Small Agri-biodiesel Producer Tax Credit. The effective tax rate in the nine months ended September 30, 2019 does not reflect these credits as they were not applicable for 2018 or 2019.
There were no unrecognized tax benefits at September 30, 2019 and unrecognized tax benefits of $2,804 at December 31, 2018. As mentioned above, the Company settled the 2014, 2015, and 2016 IRS audit through resolution of issues previously provided for as unrecognized tax benefits.
FutureFuel recorded interest and penalties, net, as a component of income tax provision and had accrued balances of $748 and $681 at September 30, 2019 and December 31, 2018, respectively.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
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In the three- and nine-months ended September 30, 2019, FutureFuel used the treasury method in computing earnings per share as all shares with participating security holders had vested and thus, the two class method was unnecessary. During 2018, FutureFuel had unvested participating shares and computed earnings per share using the two-class method in accordance with ASC Topic 260, Earnings per Share. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Outstanding unvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. There were no other participating securities at September 30, 2019 or 2018.
FutureFuel had shares contingently issuable of 53,405 and 160,218 associated with outstanding service-based restricted stock units for the three- and nine-month periods ended September 30, 2018, respectively. These shares were not included in the earnings per share calculations as the vesting conditions had not been satisfied. There were no outstanding service-based restricted stock units for the three- and nine-months ended September 30, 2019.
Basic and diluted earnings per common share were computed as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 6,622 | $ | 9,445 | $ | 15,808 | $ | 51,322 | ||||||||
Less: distributed earnings allocated to non-vested stock | - | - | - | - | ||||||||||||
Less: undistributed earnings allocated to non-vested restricted stock | - | (4 | ) | - | (26 | ) | ||||||||||
Numerator for basic earnings per share | $ | 6,622 | $ | 9,441 | $ | 15,808 | $ | 51,296 | ||||||||
Effect of dilutive securities: | ||||||||||||||||
Add: undistributed earnings allocated to non-vested restricted stock | - | 4 | - | 26 | ||||||||||||
Less: undistributed earnings reallocated to non-vested restricted stock | - | (4 | ) | - | (26 | ) | ||||||||||
Numerator for diluted earnings per share | $ | 6,622 | $ | 9,441 | $ | 15,808 | $ | 51,296 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding – basic | 43,743,243 | 43,724,195 | 43,743,243 | 43,719,215 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options and other awards | - | 8,725 | 1,910 | 6,155 | ||||||||||||
Weighted average shares outstanding – diluted | 43,743,243 | 43,732,920 | 43,745,153 | 43,725,370 | ||||||||||||
Basic earnings per share | $ | 0.15 | $ | 0.22 | $ | 0.36 | $ | 1.17 | ||||||||
Diluted earnings per share | $ | 0.15 | $ | 0.22 | $ | 0.36 | $ | 1.17 |
Certain options to purchase FutureFuel’s common stock were not included in the computation of diluted earnings per share because they were anti-dilutive in the period. For the three- and nine-months ended September 30, 2019, 50,000 and 30,000 options were excluded on a weighted average basis, respectively. There were no options excluded on this basis for the three-months ended September 30, 2018. The weighted average number of options excluded on this basis was 20,000 for the nine-months ended September 30, 2018.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
| SEGMENT INFORMATION |
FutureFuel has two reportable segments organized along similar product groups – chemicals and biofuels.
Chemicals
FutureFuel’s chemical segment manufactures diversified chemical products that are sold externally to third party customers. This segment is comprisedcomposed of two components: “custom manufacturing” (manufacturing chemicals for specific customers) and “performance chemicals” (multi-customer specialty chemicals).
Biofuels
FutureFuel’s biofuels segment primarily manufactures and markets biodiesel. Biodiesel revenues are generated through the sale of biodiesel to customers through FutureFuel’s distribution network at the Batesville Plant, through distribution facilities available at leased oil storage facilities, and through a network of remotely located tanks. Biofuels revenues also include the sale of biodiesel blends with petrodiesel; petrodiesel with no biodiesel added; internally generated, separated Renewable Identification Numbers (“RINs”); biodiesel production byproducts; and the purchase and sale of other petroleum products on common carrier pipelines. Biodiesel selling prices and profitability can at times fluctuate based on the timing of unsold, internally generated RINs. FutureFuel does not allocate production costs to internally generated RINs, and, from time to time, can enter into sales of biodiesel on a “RINs-free” basis, resulting in FutureFuel maintaining possession of the applicable RINs from the sale. The benefit derived from the eventual sale of the RINs is not reflected in results of operations until such time as the RINs sale has been completed, which may lead to variability in reported operating results.
Summaryof long-livedassetsandrevenuesbygeographic area
All of FutureFuel’s long-lived assets are located in the United States.
Most of FutureFuel’s sales are transacted with control and title passing at the time of shipment from the Batesville Plant, although some sales are transacted with control and title passing at the delivery point. While many of FutureFuel’s chemicals are utilized to manufacture products that are shipped, further processed, and/or consumed throughout the world, the chemical products, with limited exceptions, generally leave the United States only after ownership has transferred from FutureFuel to the customer. FutureFuel is rarely the exporter of record, never the importer of record into foreign countries, and is not always aware of the exact quantities of its products that are moved into foreign markets by its customers. FutureFuel does track the addresses of its customers for invoicing purposes and uses this address to determine whether a particular sale is within or outside the United States. FutureFuel’s revenues attributable to the United States and foreign countries (based upon the billing addresses of its customers) were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
United States | $ | 65,340 | $ | 81,152 | $ | 183,606 | $ | 223,943 | ||||||||
All Foreign Countries | 344 | 270 | 1,443 | 1,562 | ||||||||||||
Total | $ | 65,684 | $ | 81,422 | $ | 185,049 | $ | 225,505 |
Revenues from a single foreign country during the three- and nine-months ended September 30, 2019 and 2018 did not exceed 1% of total revenues.
NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
Summary of business by segment
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Custom chemicals | $ | 25,270 | $ | 23,973 | $ | 70,935 | $ | 74,465 | $ | 23,760 | $ | 23,700 | ||||||||||||
Performance chemicals | 3,376 | 4,049 | 10,922 | 14,165 | 3,933 | 3,652 | ||||||||||||||||||
Chemicals revenue | 28,646 | 28,022 | 81,857 | 88,630 | 27,693 | 27,352 | ||||||||||||||||||
Biofuels revenue | 37,038 | 53,400 | 103,192 | 136,875 | 25,389 | 21,149 | ||||||||||||||||||
Total Revenue | $ | 65,684 | $ | 81,422 | $ | 185,049 | $ | 225,505 | $ | 53,082 | $ | 48,501 | ||||||||||||
Segment gross profit (loss) | ||||||||||||||||||||||||
Chemicals | $ | 8,488 | $ | 8,898 | $ | 22,978 | $ | 24,470 | $ | 8,014 | $ | 7,309 | ||||||||||||
Biofuels | (3,026 | ) | 3,755 | (10,984 | ) | 33,961 | 8,385 | (4,047 | ) | |||||||||||||||
Total gross profit | 5,462 | 12,653 | 11,994 | 58,431 | $ | 16,399 | $ | 3,262 | ||||||||||||||||
Corporate expenses | (2,187 | ) | (2,424 | ) | (6,323 | ) | (7,795 | ) | ||||||||||||||||
Income before interest and taxes | 3,275 | 10,229 | 5,671 | 50,636 | ||||||||||||||||||||
Interest and other income | 4,404 | 3,358 | 13,156 | 6,688 | ||||||||||||||||||||
Interest and other expense | (43 | ) | (130 | ) | (130 | ) | (3,666 | ) | ||||||||||||||||
Income tax provision | (1,014 | ) | (4,012 | ) | (2,889 | ) | (2,336 | ) | ||||||||||||||||
Net income | $ | 6,622 | $ | 9,445 | $ | 15,808 | $ | 51,322 |
Depreciation is allocated to segment costscost of goods sold based on plant usage. The total assets and capital expenditures of FutureFuel have not been allocated to individual segments as large portions of these assets are shared to varying degrees by each segment, causing such an allocation to be of little value.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
15) | SPECIAL CASH DIVIDEND |
On March 23, 2020, the Company declared a special cash dividend of $3.00 per share on common stock in the amount of $131,230 that was paid on April 17, 2020.
RECENTLY ISSUED ACCOUNTING STANDARDS |
Recently Adopted Accounting Standards
In the first quarter of 2020, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and the associated ASUs (collectively “Topic 326”) on a modified retrospective approach. The amendments replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The Company recorded a reduction to opening retained earnings of $12 and an allowance for bad debt of $12 on our consolidated financial statements.
Recently Issued Accounting Standards Not Adopted
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, "Income Taxes" and improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating the impact of adopting this guidance.
Other
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Effective March 12, 2020, the guidance in the update is in response to concerns about structural risks of interbank offered rates (IBORs), and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. This guidance will ease the accounting burden associated with transitioning away from reference rates that are expected to be discontinued within our credit facility as described in Note 10.
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NotestoConsolidatedFinancialStatementsofFutureFuelCorp.
(Dollarsinthousands,exceptpershareamounts)
(Unaudited)
| LEGAL MATTERS |
From time to time, FutureFuel and its operations are parties to, or targets of, lawsuits, claims, investigations, regulatory matters, and proceedings, which are being handled and defended in the ordinary course of business. While FutureFuel is unable to predict the outcomes of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.
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On January 30, 2020, the World Health Organization declared the coronavirus outbreak of 2019 (“COVID-19”) a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which FutureFuel operates. FutureFuel continues to take actions to help prevent the spread of COVID-19 and, to date, has had no negative impact on our ability to operate the plant safely and in a way that meets our customers’ demands. It is unknown how long the adverse financial conditions associated with COVID-19 will last and what the complete effect will be to FutureFuel. To date, FutureFuel is experiencing declining revenue and at times has experienced delayed shipments of select raw material supplies.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to provide emergency assistance for individuals, families and businesses affected by the coronavirus pandemic. Under the CARES Act, certain subsidiaries of FutureFuel entered into a loan with Saint Louis Bank pursuant to the Paycheck Protection Program (“PPP”) totaling $8,180 on April 10, 2020. At the time that FutureFuel applied for the PPP loan, it qualified to receive the funds pursuant to the then published eligibility requirements. FutureFuel ensured continued operation as part of the nation’s critical infrastructure on the receipt and availability of these funds. However, the Small Business Administration and Treasury Department subsequently issued new guidance that cast doubt on the ability of public companies to qualify for a PPP loan. As a result, FutureFuel, out of an abundance of caution, determined to repay the full amount of the PPP loan on May 5, 2020.
In the absence of any government support from the PPP to mitigate the adverse impact of COVID-19 on our business, it is incumbent on FutureFuel to manage its response to this situation by drawing on its own resources. This resulted in reduced profitability to FutureFuel. The nature and extent of this response will be determined by the duration and severity of the on-going pandemic.
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 and biofuels. Within the chemical segment are two product groupings: custom chemicals and performance chemicals. The custom product group is comprisedcomposed of specialty chemicals manufactured for a single customer whereas the performance product group is comprisedcomposed of chemicals manufactured for multiple customers. The biofuels segment is comprisedcomposed of one product group. Management believes that the diversity of each segment strengthens the company in the ability to utilize resources and is committed to growing each segment.
COVID-19
In March 2020, the World Health Organization categorized COVID-19 as a pandemic. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. Our priority has been to protect the well-being of our employees, support our customers, obtain materials from our suppliers, and maintain our manufacturing operations. We have been able to continue supplying our products to our customers to date, however, some customers have reduced their near-term demand. We have also been able to find alternative sources for raw materials and inputs to meet our near-term supply requirements.
We are closely monitoring the impact of COVID-19 on all aspects of our business, including its impact on our customers, employees, and suppliers. The extent to which COVID-19 impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
Because the magnitude and duration of the COVID-19 pandemic and its economic consequences are unclear, the pandemic’s impact on our performance is difficult to predict. The three principle areas we anticipate COVID-19 to negatively impact our financial performance are through its impact on our customer demand, the impact on our ability to procure raw materials and inputs from suppliers, and our ability to operate our manufacturing facility.
Customer Demand – Several of our major chemical customers sell the products we produce for them in to markets that have been significantly impacted by COVID-19. The energy and automotive markets in particular have drastically been impacted starting in April which we anticipate will reduce chemical segment revenue the remainder of the year based on current estimates. Low diesel prices and a Renewable Identification Number (RIN) market that has stagnated on uncertainty of required mandates has similarly reduced the value of our finished product. The duration of this impact of COVID-19 is clearly difficult to forecast. We currently expect these markets to recover over time. However, the speed at which these market sectors rebound is highly uncertain and will be determined by reopening of economies and restoration of consumer confidence.
Supply Chain Impact – Supplier shutdowns may result in raw material or input shortages and negatively impact our ability to manufacture products and meet our customers’ demand. In our biofuel segment, we are seeing significant contraction among many of our feedstock suppliers. Closures and idling of restaurants (used cooking oil source), ethanol plants (corn oil source), rendering and poultry plants (tallow and grease source) have impacted our traditional supply chain. In addition, supply shortages may impact the timing of when customer facilities reopen and/or increase production and the speed at which customers ramp up production, negatively impacting demand for our products. Lower demand increases the risk that certain suppliers may face financial issues, potentially impacting their ability to supply.
Operations Impact - Our manufacturing is generally considered critical services and our plant remains open to meet customer demand. In an effort to contain the spread of COVID-19, maintain the well-being of our employees, ensure compliance with governmental requirements or respond to declines in demand from customers, we have had, where possible, employees work from home and temporarily closed portions of our offices. We continue to take actions to help prevent the spread of COVID-19 at work including social distancing, expanded cleaning and sanitization, adjusting work hours and temperature checks. To date we have had no negative impact on our ability to operate the plant safely and in a way that meets our customers’ demands.
Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations. For more information on the risks associated with COVID-19, refer to Part II, Item 1A, "Risk Factors" herein.
Summary of Financial Results
Set forth below is a summary of certain consolidated financial information for the periods indicated.
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
Dollar | % | Dollar | % | |||||||||||||||||||||||||||||
2019 | 2018 | Change | Change | 2020 | 2019 | Change | Change | |||||||||||||||||||||||||
Revenue | $ | 65,684 | $ | 81,422 | $ | (15,738 | ) | (19.3% | ) | $ | 53,082 | $ | 48,501 | $ | 4,581 | 9.4 | % | |||||||||||||||
Income from operations | $ | 3,275 | $ | 10,229 | $ | (6,954 | ) | (68.0% | ) | $ | 13,979 | $ | 1,211 | $ | 12,768 | 1054.3 | % | |||||||||||||||
Net income | $ | 6,622 | $ | 9,445 | $ | (2,823 | ) | (29.9% | ) | $ | 19,043 | $ | 5,499 | $ | 13,544 | 246.3 | % | |||||||||||||||
Earnings per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.15 | $ | 0.22 | $ | (0.07 | ) | (31.8% | ) | $ | 0.44 | $ | 0.13 | $ | 0.31 | 238.5 | % | |||||||||||||||
Diluted | $ | 0.15 | $ | 0.22 | $ | (0.07 | ) | (31.8% | ) | $ | 0.44 | $ | 0.13 | $ | 0.31 | 238.5 | % | |||||||||||||||
Capital expenditures (net of customer reimbursements) | $ | 572 | $ | 642 | $ | (70 | ) | (10.9% | ) | $ | 1,287 | $ | 423 | $ | 864 | 204.3 | % | |||||||||||||||
Adjusted EBITDA | $ | 6,834 | $ | 13,661 | $ | (6,827 | ) | (50.0% | ) | $ | 10,177 | $ | 5,415 | $ | 4,762 | 87.9 | % |
Nine Months Ended September 30, | ||||||||||||||||
Dollar | % | |||||||||||||||
2019 | 2018 | Change | Change | |||||||||||||
Revenue | $ | 185,049 | $ | 225,505 | $ | (40,456 | ) | (17.9% | ) | |||||||
Income from operations | $ | 5,671 | $ | 50,636 | $ | (44,965 | ) | (88.8% | ) | |||||||
Net income | $ | 15,808 | $ | 51,322 | $ | (35,514 | ) | (69.2% | ) | |||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.36 | $ | 1.17 | $ | (0.81 | ) | (69.2% | ) | |||||||
Diluted | $ | 0.36 | $ | 1.17 | $ | (0.81 | ) | (69.2% | ) | |||||||
Capital expenditures (net of customer reimbursements) | $ | 1,446 | $ | 1,539 | $ | (93 | ) | (6.0% | ) | |||||||
Adjusted EBITDA | $ | 15,633 | $ | 63,184 | $ | (47,551 | ) | (75.3% | ) |
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 utilize 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 net income, the most directly comparable GAAP performance financial measure, with adjusted EBITDA.
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Net income | $ | 6,622 | $ | 9,445 | $ | 15,808 | $ | 51,322 | $ | 19,043 | $ | 5,499 | ||||||||||||
Depreciation | 3,620 | 2,732 | 9,092 | 8,502 | 3,004 | 2,725 | ||||||||||||||||||
Non-cash stock-based compensation | 21 | 107 | 21 | 321 | 49 | - | ||||||||||||||||||
Interest and dividend income | (2,718 | ) | (2,543 | ) | (7,830 | ) | (6,688 | ) | (1,967 | ) | (2,362 | ) | ||||||||||||
Non-cash interest expense and amortization of deferred financing costs | 43 | 43 | 130 | 130 | 56 | 43 | ||||||||||||||||||
(Gain) loss on disposal of property and equipment | (22 | ) | 4 | (11 | ) | 41 | ||||||||||||||||||
Loss on disposal of property and equipment | 2 | 3 | ||||||||||||||||||||||
(Gain) loss on derivative instruments | (322 | ) | 676 | 711 | 3,947 | (6,857 | ) | 1,476 | ||||||||||||||||
(Gain) loss on marketable securities | (1,424 | ) | (815 | ) | (5,177 | ) | 3,273 | |||||||||||||||||
Income tax provision | 1,014 | 4,012 | 2,889 | 2,336 | ||||||||||||||||||||
Loss (gain) on marketable securities | 10,059 | (2,927 | ) | |||||||||||||||||||||
Income tax (benefit) provision | (13,212 | ) | 958 | |||||||||||||||||||||
Adjusted EBITDA | $ | 6,834 | $ | 13,661 | $ | 15,633 | $ | 63,184 | $ | 10,177 | $ | 5,415 |
The following table reconciles cash flows from operations, the most directly comparable GAAP liquidity financial measure, with adjusted EBITDA.
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Net cash provided by operating activities | $ | 24,358 | $ | 79,169 | $ | 4,034 | $ | (3,289 | ) | |||||||
Benefit for deferred income taxes | 273 | 3,609 | 22 | 415 | ||||||||||||
Interest and dividend income | (7,830 | ) | (6,688 | ) | (1,967 | ) | (2,362 | ) | ||||||||
Income tax provision | 2,889 | 2,336 | (13,212 | ) | 958 | |||||||||||
Loss on derivative instruments | 711 | 3,947 | ||||||||||||||
(Gain) loss on derivative instruments | (6,857 | ) | 1,476 | |||||||||||||
Change in fair value of derivative instruments | 357 | 2,290 | 1,874 | 286 | ||||||||||||
Changes in operating assets and liabilities, net | (5,125 | ) | (21,479 | ) | ||||||||||||
Change in operating assets and liabilities, net | 26,282 | 7,930 | ||||||||||||||
Other | 1 | 1 | ||||||||||||||
Adjusted EBITDA | $ | 15,633 | $ | 63,184 | $ | 10,177 | $ | 5,415 |
Results of Operations
Consolidated
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||
Change | Change | Change | ||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | 2020 | 2019 | Amount | % | |||||||||||||||||||||||||||||||||||||
Revenue | $ | 65,684 | $ | 81,422 | $ | (15,738 | ) | (19.3% | ) | $ | 185,049 | $ | 225,505 | $ | (40,456 | ) | (17.9% | ) | ||||||||||||||||||||||||||||||
Revenues | $ | 53,082 | $ | 48,501 | $ | 4,581 | 9.4 | % | ||||||||||||||||||||||||||||||||||||||||
Volume/product mix effect | $ | (11,108 | ) | (13.6% | ) | $ | (38,678 | ) | (17.2% | ) | $ | 12,762 | 26.3 | % | ||||||||||||||||||||||||||||||||||
Price effect | $ | (4,630 | ) | (5.7% | ) | $ | (1,778 | ) | (0.7% | ) | $ | (8,181 | ) | (16.9 | %) | |||||||||||||||||||||||||||||||||
Gross profit | $ | 5,462 | $ | 12,653 | $ | (7,191 | ) | (56.8% | ) | $ | 11,994 | $ | 58,431 | $ | (46,437 | ) | (79.5% | ) | $ | 16,399 | $ | 3,262 | $ | 13,137 | 402.7 | % |
Consolidated revenue in the three- and nine-monthsthree months ended September 30, 2019 decreased $15,738 and $40,456, respectively,March 31, 2020 increased $4,581 compared to the three- and nine-monthsthree months ended September 30, 2018.March 31, 2019. This decreaseincrease primarily resulted from decreasedincreased sales volumes andin the biofuels segment that were partially offset by decreased prices of biodiesel in the three- and nine-month periods ended September 30, 2019. In addition, in the nine-month period ended September 30, 2019, revenue was reduced by lower sales volumes in the chemical segment. Partially reducing the nine-month price effect was prior year rebates paid 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 nine-monthsthree months ended September 30, 2019 decreased $7,191 and $46,437, respectively,March 31, 2020 increased $13,137 compared to the three- and nine-monthsthree months ended September 30, 2018.March 31, 2019. This decrease wasincrease primarily fromresulted from: i) the biofuels 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 were reduced sales volumesthree-month period; and average selling price in the biofuels segment. Additionally, chemical segment sales volumes reduced gross profit in the nine-month period. 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 $322$6,857 in the three months ended September 30, 2019March 31, 2020 as compared to a loss of $676$1,476 in the three months ended September 30, 2018 and a loss of $711March 31, 2019. Also benefiting gross profit in both the ninethree months ended September 30,March 31, 2020 and 2019 as compared to a loss of $3,947 in the same period of 2018. Additionally, gross profit was favorably impacted in the three- and nine-months ended September 30, 2019, as compared to the three- and nine-months ended September 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 by $557$1,319 and $2,480 in the three- and nine-months ended September 30, 2019 as compared to a decrease in gross profit of $623 and $2,621 in the three- and nine-months ended September 30, 2018,$1,637, respectively.
Operating Expenses
Operating expenses decreased $237 and $1,472increased $369 in the three- and nine-monthsthree months ended September 30, 2019,March 31, 2020, as compared to the three- and nine-monthsthree-months ended September 30, 2018.March 31, 2019. This decreaseslight increase was primarily from reduced compensation expense on accrued bonuses related to the benefit of the 2017 BTC reinstated in the threeincreased research and nine-month period ended September 30, 2018.
development expenses.
Income tax provisionTax Provision
The effective tax rate for the three-and nine-monthsthree-months ended September 30,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 includedon 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 benefit from incometaxable 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 settlementsrate for 2014, 2015, and 2016 Internal Revenue Service audits. 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 nine-monthsthree months ended September 30,March 31, 2019 reflects the unfavorable effect of the BTC and Small Producer Agri-biodiesel Producer Credit not being in the law for the first quarter of 2019. The rate was also favorably impacted byfrom a retroactive research and development credit for a prior year in a state where we hadFutureFuel does significant business.
The nine-month period ended September 30, 2018 included the favorable effect of the BTC and Small Agri-biodiesel Producer Tax Credit (2017 BTC which was reinstated in the three months ended March 31, 2018). These tax credits were not in law in 2019.
There were no unrecognized tax benefits at September 30, 2019 and there were unrecognized tax benefits of $2,804 atMarch 31, 2020 or December 31, 2018. As mentioned in the previous paragraph, we settled the 2014, 2015, and 2016 IRS audits through resolution of issues previously provided for as unrecognized tax benefits.2019.
WeFutureFuel recorded interest and penalties, net, as a component of income tax provision withand had accrued balances of $748($3) and $681($557) at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
Net Income
Net income for the three- and nine-monthsthree months ended September 30, 2019 decreased $2,823 and $35,514, 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 and lower prices of biodiesel. The decrease in the nine-month period resulted primarily from the absence of biodiesel tax credits and incentives that benefitedwere in effect in the prior year andthree months ended March 31, 2020 that were not in effect for 2019 (see Note 2) and to a lesser extent, lower sales volumestax benefits in effect in the chemical segment.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.
Chemical Segment
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||
Change | Change | Change | ||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | 2020 | 2019 | Amount | % | |||||||||||||||||||||||||||||||||||||
Revenue | $ | 28,646 | $ | 28,022 | $ | 624 | 2.2 | % | $ | 81,857 | $ | 88,630 | $ | (6,773 | ) | (7.6% | ) | |||||||||||||||||||||||||||||||
Revenues | $ | 27,693 | $ | 27,352 | $ | 341 | 1.2 | % | ||||||||||||||||||||||||||||||||||||||||
Volume/product mix effect | $ | 466 | 1.7 | % | $ | (7,592 | ) | (8.6% | ) | $ | 879 | 3.2 | % | |||||||||||||||||||||||||||||||||||
Price effect | $ | 158 | 0.6 | % | $ | 819 | 0.9 | % | $ | (538 | ) | (2.0 | %) | |||||||||||||||||||||||||||||||||||
Gross profit | $ | 8,488 | $ | 8,898 | $ | (410 | ) | (4.6% | ) | $ | 22,978 | $ | 24,470 | $ | (1,492 | ) | (6.1% | ) | $ | 8,014 | $ | 7,309 | $ | 705 | 9.6 | % |
Chemical revenue in the three months ended September 30, 2019March 31, 2020 increased 2.2%1.2% or $624$341 compared to the three months ended September 30, 2018.March 31, 2019. Revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months ended September 30, 2019March 31, 2020 totaled $25,270,$23,760, an increase of $1,297$60 from the same period in 2018. This increase was primarily attributed2019. Increased sales of products sold to the timing of products delivered.energy market were mostly offset by declines in agrochemical sales volumes. Performance chemicals (comprised(composed of multi-customer products which are sold based on specification) revenue was $3,376$3,933 in the three months ended September 30, 2019, a decreaseMarch 31, 2020, an increase of $673$281 from the three months ended September 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.
Chemical revenue in the nine months ended September 30, 2019 decreased 7.6% or $6,773 compared to the nine months ended September 30, 2018. Revenue for our custom chemicals (unique chemicals produced for specific customers) for the nine months ended September 30, 2019 totaled $70,935, a decrease of $3,530 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. During the current quarter, a custom agrochemical customer informed us that they would not renew their contract for 2020. For the three- and nine-month period, revenue from this customer totaled $4,877 and $12,195, respectively. Performance chemicals (comprised of multi-customer products which are sold based on specification) revenue was $10,922 in the nine months ended September 30, 2019, a decreasereduced supply of $3,243 from the nine months ended September 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 chemical segment for the three- and nine-monthsthree months ended September 30, 2019, decreased 4.6%March 31, 2020, increased 9.6% or $410 and 6.1% or $1,492, respectively,$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 and partially offset by 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 nine-months ended September 30, 2019 by $836, as compared to a decrease in gross profit of $601, in the same period of 2018.market.
Biofuels Segment
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||
Change | Change | Change | ||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | 2020 | 2019 | Amount | % | |||||||||||||||||||||||||||||||||||||
Revenue | $ | 37,038 | $ | 53,400 | $ | (16,362 | ) | (30.6 | %) | $ | 103,192 | $ | 136,875 | $ | (33,683 | ) | (24.6 | %) | ||||||||||||||||||||||||||||||
Revenues | $ | 25,389 | $ | 21,149 | $ | 4,240 | 20.0 | % | ||||||||||||||||||||||||||||||||||||||||
Volume/product mix effect | $ | (11,574 | ) | (21.6 | %) | $ | (31,086 | ) | (22.7 | %) | $ | 11,883 | 56.2 | % | ||||||||||||||||||||||||||||||||||
Price effect | $ | (4,788 | ) | (9.0 | %) | $ | (2,597 | ) | (1.9 | %) | $ | (7,643 | ) | (36.1 | %) | |||||||||||||||||||||||||||||||||
Gross (loss) profit | $ | (3,026 | ) | $ | 3,755 | $ | (6,781 | ) | (180.6 | %) | $ | (10,984 | ) | $ | 33,961 | $ | (44,945 | ) | (132.3 | %) | ||||||||||||||||||||||||||||
Gross profit | $ | 8,385 | $ | (4,047 | ) | $ | 12,432 | (307.2 | %) |
Biofuels revenue in the three- and nine-monthsthree months ended September 30, 2019 decreased $16,362 and $33,683, 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 nine-month periodincreased 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 current quarter and not in effect in the prior year period. Partially offsetting this increase in the three months ended September 30, 2019March 31, 2020 as compared to the same period of 2018,2019, was lower selling priceprices. Global fuel markets were impacted by reduced revenue 9.0% or $4,788. Indemand for oil caused by the nine-month period ended September 30, 2019 as compared to the same period of 2018, net sales prices decreased revenue 1.9% or $2,597. In the nine-month period ended September 30, 2018, 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 nine months ended September 30, 2018; these rebates were not presentsignificant declines in the nine-month period ended September 30, 2019. The BTC has not been reinstated beyond 2017. Please see Note 2 for additional discussion.petroleum and biodiesel oil prices.
Biofuels 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 ninethree months ended September 30, 2019March 31, 2020 as compared to the ninethree months ended September 30, 2018.March 31, 2019.
A significant portion of our biodiesel sold was to one major refiner/blender in 2019 and two in 2018.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-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 had a gross loss of $3,026profit was $8,385 in the three months ended September 30, 2019,March 31, 2020, as compared to a gross profitloss of $3,755$4,047 in the same period of 2018,2019, primarily on lowerfrom: i) increased sales volumes and togiven improved market conditions with the BTC in effect (which was not in effect in the prior year period); ii) the change in the activity in derivative instruments with a lesser extent, lower sales prices. Partially reducing the gross lossgain of $6,857 in the three months ended September 30,March 31, 2020, as compared to a loss of $1,476 in the same period of 2019. Also benefiting gross profit in both three-month periods ended March 31, 2020 and 2019 was the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting as compared to the same period in 2018.accounting. This adjustment decreased gross loss $465 in the three months ended September 30, 2019, compared to a decrease inincreased gross profit of $460 in the three months ended September 30, 2018.
Biofuels gross loss was also reduced by the change in the activity in derivative instruments with a gain of $322 in the three months ended September 30, 2019, as compared to a loss of $676 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$817 and options contracts. We account for these derivative instruments in accordance with accounting standards whereby the fair value of our 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.$1,110, respectively.
We recognize all derivative instruments as either assets or liabilities at fair value in itsour consolidated balance sheet.sheets. 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 nine-month period ended September 30, 2019, biofuels gross loss was $10,984 as compared to a gross profit of $33,961 in the same period of 2018. The change was primarily from the retroactive reinstatement of the 2017 BTC, totaling $28,865, which benefited the first nine months of 2018 and has not been reinstated past December 31, 2017. Further increasing gross loss were lower sales volumes in the nine months of 2019 as compared to the same period of 2018. Gross loss was partially reduced in 2019, by the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment reduced gross loss $1,645 in the nine months ended September 30, 2019, as compared to a reduction in gross profit of $2,020 in the nine months ended September 30, 2018. In addition, biofuels gross loss was reduced by the change in the activity in derivative instruments with a loss of $711 in the nine months ended September 30, 2019, as compared to a loss of $3,947 in the same period of 2018.
The volumes and carrying values of our derivative instruments were as follows:
September 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 | 10 | $ | 60 | 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-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-hold transactions for the three-three months ended March 31, 2020 and nine-months ended September 30, 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-hold customers are similar to other custom chemicals customers. Revenue under bill-and-hold arrangements were $14,417$10,153 and $11,576$11,756 for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively. For the nine months ended September 30, 2019 and 2018, bill-and-hold revenue were $38,179 and $32,470, respectively.
Liquidity and Capital Resources
Our net cash from operating activities, investing activities, and financing activities for the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 are set forth in the following table.
2019 | 2018 | ||||||||
Net cash from operating activities | $ | 24,358 | $ | 79,169 | |||||
Net cash from investing activities | $ | 4,488 | $ | 13,600 | |||||
Net cash used in financing activities | $ | (7,873 | ) | $ | (8,048 | ) |
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 fromwas provided by operating activities decreased from $79,169of $4,034 in the first nine monthsquarter of 20182020 as compared to $24,358$3,289 of cash used in the first nine monthsquarter of 2019. This $54,811 decrease$7,323 increase was primarily attributable to the decrease of $35,514change in net income; a gainincome of $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 ofadjustments to equity securities of $6,621approximately $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 nine months ended September 30, 2019,income tax receivable, demonstrating a cash outflow of $13,587 in the first quarter of 2020 as compared to a losscash inflow of $5,597 in the nine months ended September 30, 2018 for a total change of $12,218,$1,340, and a lesser increase of $5,234 in accounts payable, including accounts payable - related parties, compared to the increase of $14,967 for the nine months ended September 30, 2018, for a net change in accounts receivable, including accounts receivable-related parties, demonstrating a cash outflow of $9,733. $13,628 in the first quarter of 2020 as compared to a cash inflow of $400 in the first quarter of 2019.
Investing Activities
Cash from investing activities decreasedincreased from $13,600$3,038 of cash used in the first ninethree months of 20182019 to $4,488$3,838 of cash provided by investing activities in the first ninethree months of 2019.2020. Of the $9,112$6,876 change, $4,516$8,132 was the result of decreased cash inflows froma decrease in net salespurchases of marketable securities in the first ninethree months of 20192020 compared to the first three months of 2019. Such net salespurchases totaled $964, in the first ninethree months of 2018. Such2020, compared to $9,096 in net sales totaled $9,762,purchases in the first ninethree months of 2019, compared to $14,278 in net sales in the first nine months of 2018.2019. Our capital expenditures and customer reimbursements for capital expenditures for the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 are summarized in the following table:
Three Months Ended March 31, | ||||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash paid for capital expenditures | $ | 6,139 | $ | 3,084 | $ | 1,608 | $ | 2,246 | ||||||||
Cash received from customers as reimbursement of capital expenditures* | $ | (4,693 | ) | $ | (1,545 | ) | $ | (321 | ) | $ | (1,823 | ) | ||||
Cash paid for capital expenditures, net of customer reimbursements | $ | 1,446 | $ | 1,539 | ||||||||||||
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 was $7,873$3,101 and $8,048,$2,624, in the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. This is primarilyThe 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 the first ninethree 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 ninethree 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 $7,873 and $7,872$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 nine-month periods ended September 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 September 30, 2019March 31, 2020 and December 31, 2018,2019, we also had investments in certain preferred stock, trust preferred securities, exchange-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 $75,583$59,644 and $79,888$73,620 at September 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 September 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 September 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-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 ninethree 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. At September 30, 2019March 31, 2020 and December 31, 2018,2019, the fair values of our derivative instruments were a net asset of $60$1,607 and a net liability of $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 fluctuations due to unpredictable factors such as weather conditions, overall economic conditions, governmental policies, commodity markets, and global supply and demand.
We prepared a sensitivity analysis of our exposure to market risk with respect to key raw materials and conversion costs for which we do not possess contractual market price adjustment protections, based on average prices for the first ninethree months of 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 | 256,495 | LB | 10.0 | % | 6,977 | 58.2 | % | ||||||||||
Methanol | 117,689 | LB | 10.0 | % | 2,083 | 17.4 | % | ||||||||||
Electricity | 90 | MWH | 10.0 | % | 500 | 4.2 | % | ||||||||||
Natural Gas | 964 | MCF | 10.0 | % | 285 | 2.4 | % | ||||||||||
Sodium Methylate | 6,951 | LB | 10.0 | % | 261 | 2.2 | % | ||||||||||
Coal | 26 | Ton | 10.0 | % | 172 | 1.4 | % | ||||||||||
Caustic soda | 9,438 | LB | 10.0 | % | 125 | 1.0 | % |
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 |
We had no borrowings at September 30, 2019March 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 at September 30, 2019March 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.
Exhibit | Description |
11. | |
10.20 | |
10.21 | |
31(a). | Rule 13a-15(e)/15d-15(e) Certification of chief executive officer |
31(b). | Rule 13a-15(e)/15d-15(e) Certification of chief principal officer |
32. | Section 1350 Certification of chief executive officer and principal financial officer |
101 | Interactive Data Files** |
101.INS | XBRL Instance |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation |
101.DEF | XBRL Taxonomy Extension Definition |
101.LAB | XBRL Taxonomy Extension Labels |
101.PRE | XBRL Taxonomy Extension Presentation |
** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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. |
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By: | /s/ Paul A. Novelly |
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Paul A. Novelly, Chairman and Chief |
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Executive Officer |
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By: | /s/ Rose M. Sparks |
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Rose M. Sparks, Chief Financial Officer |
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and Principal Financial Officer |
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