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 193
For the quarterly period ended March 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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)
(314) 854-8352
(Registrant’s Telephone Number, Including Area Code)
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 and posted on its corporate Web site, if any, 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, 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 May 10, 2019: 43,743,243
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
The following sets forth our unaudited consolidated balance sheet as of March 31, 2019, our audited consolidated balance sheet as of December 31, 2018, our unaudited consolidated statements of operations and comprehensive income for the three-month periods ended March 31, 2019 and 2018, and our unaudited consolidated statements of cash flows for the three-month periods ended March 31, 2019 and 2018.
FutureFuel Corp.
Consolidated Balance Sheets
As of March 31, 2019 and December 31, 2018
(Dollars in thousands)
(Unaudited)
March 31, 2019
December 31, 2018
Assets
Cash and cash equivalents
Accounts receivable, net of allowance for bad debts of $0
Accounts receivable – related parties
Inventory
Income tax receivable
Prepaid expenses
Prepaid expenses – related parties
Marketable securities
Deferred financing costs
Other current assets
Total current assets
Property, plant and equipment, net
Intangible assets
Other noncurrent assets
Total noncurrent assets
Total Assets
Liabilities and Stockholders’ Equity
Accounts payable
Accounts payable – related parties
Deferred revenue – short-term
Dividends payable
Accrued expenses and other current liabilities
Total current liabilities
Deferred revenue – long-term
Other noncurrent liabilities
Noncurrent deferred income tax liability
Total noncurrent liabilities
Total liabilities
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 as of March 31, 2019 and December 31, 2018
Accumulated other comprehensive income
Additional paid in capital
Retained earnings
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Operations and Comprehensive Income
For the Three Months ended March 31, 2019 and 2018
(Dollars in thousands, except per share amounts)
Three Months Ended March 31,
2019
2018
Revenue
Revenues – related parties
Cost of goods sold
Cost of goods sold – related parties
Distribution
Distribution – related parties
Gross profit
Selling, general, and administrative expenses
Compensation expense
Other expense
Related party expense
Research and development expenses
Income from operations
Interest and dividend income
Interest expense
Gain/(loss) on marketable securities
Income before income taxes
Provision/(benefit) for income taxes
Net income
Earnings per common share
Basic
Diluted
Weighted average shares outstanding
Comprehensive Income
Other comprehensive income/(loss) from unrealized net gain/(loss) on available-for-sale securities
Income tax effect
Total unrealized gain/(loss), net of tax
Comprehensive income
Consolidated Statements of Stockholders’ Equity
For the Three Months Ended March 31, 2019
Accumulated
Other
Additional
Total
Common Stock
Comprehensive
paid-in
Retained
Stockholders’
Shares
Amount
Income
Capital
Earnings
Equity
Balance - December 31, 2018
Other comprehensive gain
Balance - March 31, 2019
For the Three Months Ended March 31, 2018
Balance - December 31, 2017 - As previously reported
Prior period adjustment: Change in accounting principles
Balance - January 1, 2018 - As adjusted
Stock based compensation
Other comprehensive loss
Balance - March 31, 2018
Consolidated Statements of Cash Flows
Cash flows from operating activities
Adjustments to reconcile net income to net cash from operating activities:
Depreciation
Amortization of deferred financing costs
Benefit for deferred income taxes
Change in fair value of equity securities
Change in fair value of derivative instruments
(Gain)/loss on the sale of investments
Loss on disposal of fixed assets
Noncash interest expense
Changes in operating assets and liabilities:
Accounts receivable
Accrued interest on marketable securities
Other assets
Deferred revenue
Net cash (used in)/provided by operating activities
Cash flows from investing activities
Collateralization of derivative instruments
Purchase of marketable securities
Proceeds from the sale of marketable securities
Proceeds from the sale of fixed assets
Capital expenditures
Net cash (used in)/provided by investing activities
Cash flows from financing activities
Payment of dividends
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash paid for interest
Cash paid for income taxes
Noncash items incurred:
Noncash capital expenditures
Noncash operating leases
Notes to Consolidated Financial Statements of FutureFuel Corp.
1 )
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Organization
FutureFuel Corp. (“FutureFuel”), 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 comprised of biofuels, and biobased specialty chemical products. FutureFuel Chemical’s operations are reported in two segments: chemicals and biofuels.
The chemicals segment manufactures a diversified portfolio of chemical products that are sold to third party customers. The majority of the revenues from the chemicals 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. Finally, 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 2018 audited consolidated financial statements and should be read in conjunction with the 2018 audited consolidated financial statements of FutureFuel.
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 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. The unaudited consolidated financial statements include assets, liabilities, revenues, and expenses of FutureFuel and its wholly owned subsidiaries; namely, FutureFuel Chemical 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 $1.00 per gallon tax credit to the blender of biomass-based diesel with at least 0.1% petroleum-based diesel fuel. When in effect, FutureFuel is the blender of record and recognizes 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 of The Bipartisan Budget Act of 2018 passed by Congress on February 9, 2018. As this Act was passed into law in 2018, FutureFuel recognized a net estimated pretax benefit from the reinstatement in the biofuels segment of $28,869 (a reduction in sales revenue of $13,559 for customer rebates (“BTC Rebates”) upon reinstatement and a reduction in cost of goods sold of $42,428). The gallons related to this credit were sold in the twelve months ended December 31, 2017.
As part of the law from which the BTC 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 Credit was recognized as a benefit in the tax provision in the first three months of the period ended March 31, 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.
3 )
INVENTORY
The carrying values of inventory were as follows as of:
At average cost (approximates current cost)
Finished goods
Work in process
Raw materials and supplies
LIFO reserve
Total inventory
Lower of Cost or Market ("LCM") adjustments are recorded as a decrease in inventory values and an increase in cost of goods sold. The inventory is relieved at the LCM adjusted cost basis when sold. There was $121 LCM adjustment in the three months ended March 31, 2019. For the three months ended March 31, 2018, there was no LCM adjustment.
4 )
DERIVATIVE INSTRUMENTS
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 option 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 loss of $1,476 and $162 for the three months ended March 31, 2019 and 2018, respectively.
The volumes and carrying values of FutureFuel’s derivative instruments were as follows at:
Contract
quantity
Short
Fair Value
Regulated options, included in other current assets
Regulated fixed price future commitments, included in other current assets
The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $390 and $980 at March 31, 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.
5 )
MARKETABLE SECURITIES
At March 31, 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 three months ended, March 31, 2019 and 2018, the change in the fair value of equity securities was reported as gains/(losses) on marketable securities as a component of net income.
FutureFuel’s available for sale debt securities were comprised of the following at March 31, 2019 and December 31, 2018:
Adjusted Cost
Unrealized Gains
Unrealized Losses
Exchange traded debt
Trust preferred
Total debt securities
The aggregate fair value of debt securities with unrealized losses totaled $254 at March 31, 2019, and the aggregate fair value of debt securities with unrealized losses totaled $2,540 at December 31, 2018. As of March 31, 2019, FutureFuel had investments in debt securities with a total value of $254 that were in an unrealized loss position for a greater than a 12-month period. As of December 31, 2018, FutureFuel had investments in debt securities with a total value of $187 that were in an unrealized loss position for a greater than 12-month period. The unrealized loss position for those securities was $7 and $19, respectively, at March 31, 2019 and December 31, 2018. Those loss positions represented a minimal reduction for the securities and are expected to fully recover given changes in market value.
The adjusted cost basis and fair value of debt securities at March 31, 2019, by contractual maturity, are shown below.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
The following table shows the recognized change in equity securities sold and the change in unrealized fair value:
Three months ended March 31,
Net gain/(losses) recognized on equity securities
Less: net gains/(losses) recognized during the period on equity securities sold during the period
Unrealized gain/(losses) during the reporting period on equity securities held at the reporting date
6 )
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities, including those associated with related parties, consisted of the following at:
Accrued employee liabilities
$
1,878
1,253
Accrued property, franchise, motor fuel and other taxes
1,548
1,225
Lease liability
520
-
184
264
4,130
2,742
7 )
BORROWINGS
On April 16, 2015, FutureFuel, with FutureFuel Chemical as the borrower, and certain of FutureFuel’s other subsidiaries, as guarantors, entered into a $150,000 secured and committed credit facility with the lenders party thereto, Regions Bank as administrative agent and collateral agent, and PNC Bank, N.A., as syndication agent. On May 25, 2016, FutureFuel increased the credit facility by $15,000. The credit facility consists of a five-year revolving credit facility in a dollar amount of up to $165,000, which includes a sublimit of $30,000 for letters of credit and $15,000 for swingline loans (collectively, the “Credit Facility”).
The interest rate floats at the following margins over LIBOR or base rate based upon the leverage ratio from time to time:
Consolidated Leverage Ratio
Adjusted LIBOR Rate Loans and
Letter of Credit Fee
Base Rate Loans
Commitment Fee
≥ 1.00:1.0
And
< 1.50:1.0
≥ 1.50:1.0
< 2.00:1.0
≥ 2.00:1.0
< 2.50:1.0
The terms of the Credit Facility contain certain covenants and conditions including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and a minimum liquidity requirement. FutureFuel was in compliance with such covenants as of March 31, 2019.
There were no borrowings under this credit agreement at March 31, 2019 or December 31, 2018.
8 )
LEASE COMMITMENTS AND SHORT-TERM CONTRACTS
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 our date of initial application with the practical expedient election for short term lease exemption (leases shorter than 12 months are exempt from this standard) 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 4 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, a ROU asset was reported as other noncurrent assets of $1,641 and other current liabilities and other noncurrent liabilities of $370 and $1,271, respectively.
Three Months Ended
March 31,
Operating lease expense
Short-term lease expense
Cash paid for operating leases included in cash from operating activities
Right of use assets obtained in exchange for lease obligations
Supplemental balance sheet information related to leases as of March 31, 2019:
Operating lease right-of-use assets:
Total operating lease liabilities
Operating lease liabilities:
Other current liabilities
Maturities of lease liabilities as of March 31, 2019:
2020
2021
2022
2023
2024
Less: imputed interest
Present value of lease payments
9 )
PROVISION FOR INCOME TAXES
The following table summarizes the provision for income taxes.
Provision for income taxes
Effective tax rate
The effective tax rate for the three months ended March 31, 2019 reflects the unfavorable effect of the BTC and Small Agri-biodiesel Producer Tax Credit not being reinstated into law for 2019 (2017 BTC was reinstated in the three months ended March 31, 2018). The 2019 effective rate was favorably impacted by FutureFuel being granted a retroactive research and development credit for a prior year in a state where it does significant business. This three-month effective rate is expected to increase for the remainder of 2019.
Unrecognized tax benefits totaled $2,804 at March 31, 2019 and December 31, 2018.
FutureFuel records interest and penalties, net, as a component of provision for income taxes. FutureFuel accrued balances of $665 and $681 at March 31, 2019 and December 31, 2018, respectively, for interest and penalties.
10 )
EARNINGS PER SHARE
In the first three months ended March 31, 2019, FutureFuel used the treasury method in computing earnings per share as all shares with participating security holders had vested. During 2018, FutureFuel had unvested participating shares and computed earnings per share using the two-class method in accordance with ASC Topic No. 260, “Earnings per Share.” The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. 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 March 31, 2019 or 2018.
Contingently issuable shares associated with outstanding service-based restricted stock units were not included in the earnings per share calculations for the three-month period ended March 31, 2018 as the vesting conditions had not been satisfied. There were no outstanding service-based restricted stock units for the three months ended March 31, 2019.
Basic and diluted earnings per common share were computed as follows:
Numerator:
Less: distributed earnings allocated to non-vested stock
Less: undistributed earnings allocated to non-vested restricted stock
Numerator for basic earnings per share
Effect of dilutive securities:
Add: undistributed earnings allocated to non-vested restricted stock
Less: undistributed earnings reallocated to non-vested restricted stock
Numerator for diluted earnings per share
Denominator:
Weighted average shares outstanding – basic
Stock options and other awards
Weighted average shares outstanding – diluted
Basic earnings per share
Diluted earnings per share
Certain options to purchase FutureFuel’s common stock were not included in the computation of diluted earnings per share for the three months ended March 31, 2018 because they were anti-dilutive in the period. The weighted average number of options excluded on this basis was 30,000 for the three-months ended March 31, 2018. For the three months ended March 31, 2019, no options were excluded on a weighted average basis.
11 )
SEGMENT INFORMATION
FutureFuel has two reportable segments organized along similar product groups – chemicals and biofuels.
Chemicals
FutureFuel’s chemicals segment manufactures diversified chemical products that are sold externally to third party customers. This segment is comprised of two components: “custom manufacturing” (manufacturing chemicals for specific customers) and “performance chemicals” (multi-customer specialty chemicals).
Biofuels
FutureFuel’s biofuels 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. Such method of selling results in FutureFuel maintaining possession of the applicable RINs from the sale. The benefit derived from the eventual sale of the RINs is not reflected in results of operations until such time as the RIN sale has been completed, which may lead to variability in reported operating results.
Summary of long-lived assets and revenues by geographic 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:
United States
All Foreign Countries
Revenues from a single foreign country during the three ended March 31, 2019 and 2018 did not exceed 1% of total revenues.
Summary of business by segment
Custom chemicals
Performance chemicals
Chemicals revenue
Biofuels revenue
Total Revenue
Segment gross profit/(loss)
Total gross profit
Corporate expenses
Income before interest and taxes
Interest and other income
Interest and other expense
(Provision)/benefit for income taxes
Depreciation is allocated to segment costs of goods sold based on plant usage. The total assets and capital expenditures of FutureFuel have not been allocated to individual segments as large portions of these assets are shared to varying degrees by each segment, causing such an allocation to be of little value.
12 )
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 March 31, 2019 and December 31, 2018.
Asset (Liability)
Fair Value Measurements
Using
Fair Value at
Inputs Considered as:
Description
Level 1
Level 2
Level 3
Derivative instruments
Preferred stock, trust preferred, exchange traded debt instruments, and other equity instruments
13 )
RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME:
The following tables summarize changes in accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities in the three months ended March 31, 2019 and 2018.
Changes in Accumulated Other Comprehensive Income From Unrealized
Gains and Losses on Available-for-Sale Securities
Three Months Ended March 31, 2019 and 2018
(net of tax)
Balance at January 1
Other comprehensive income/(loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive income/(loss)
Balance at March 31
There were no reclassifications from accumulated other comprehensive income in the three months ended March 31, 2019 and 2018.
14 )
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.
15 )
RELATED PARTY TRANSACTIONS
FutureFuel enters into transactions with companies affiliated with or controlled by a director and significant shareholder. Revenues, expenses, prepaid amounts, and unpaid amounts related to these transactions are captured in the accompanying consolidated financial statements as related party line items.
Related party revenues are the result of sales of biodiesel, petrodiesel, blends, other petroleum products, and other similar or related products to these related parties.
Related party cost of goods sold and distribution are the result of sales of biodiesel, petrodiesel, blends, and other petroleum products to these related parties along with the associated expense from the purchase of natural gas, storage and terminalling services, and income tax and consulting services by FutureFuel from these related parties.
16 )
INTANGIBLE ASSET
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 as of March 31, 2019 and December 31, 2018. FutureFuel tests the intangible asset for impairment in accordance with Topic 350.
17 )
RECENTLY ISSUED ACCOUNTING STATEMENTS
The following table provides a brief description of recent Accounting Standard Updates ("ASU") issued by the FASB:
Standard
Effective Date
Effect on the Financial Statements
or Other Significant Matters
In August, 2018 the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals.
Annual periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including any interim period.
The Company plans to adopt the new guidance effective January 1, 2020. The new guidance is expected to have minimal impact.
18 )
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 sale are satisfied. FutureFuel sells to customers through master sales agreements or standalone purchase orders. The majority of FutureFuel's terms of sale have a single performance obligation to transfer products. Accordingly, FutureFuel recognizes revenue when control has been transferred to the customer, generally at the time of shipment or delivery of products. Under the previous revenue recognition accounting standard (“Topic 605”), FutureFuel recognized revenue upon the transfer of title and risk of loss, generally upon shipment or delivery of goods, although some revenue was recognized on a bill and hold basis.
A select number of FutureFuel custom chemical contracts within the chemical segment contain a material right as defined by Topic 606 as a result of upfront payments provided by customers. Each contract also has a performance obligation to transfer products with 30-day payment terms. FutureFuel recognizes revenue when the customer takes control of the inventory, either upon shipment or when the material is made available for pickup. FutureFuel has applied the renewal option approach in allocating the transaction price to these material rights and transfer of product. As a basis for allocating the transaction price to the material right and transfer of product, FutureFuel estimated the expected life of the product, the expected contractual volumes to be sold over that life, and the most likely expected sales price. Each estimate is updated quarterly on a prospective basis.
The majority of our revenue is from short term contracts with revenue recognized when a single performance obligation to transfer product under the terms of a contract with a customer are satisfied. Accordingly, FutureFuel recognizes revenue when control is transferred to the customer, which is when products are considered to meet customer specification and title and risk of loss are transferred. This typically occurs at the time of shipment or delivery, however, for certain contracts, this occurs upon delivery of the material to a FutureFuel storage location, ready for customer pickup and separated from other FutureFuel inventory. Revenue is measured as the amount of consideration FutureFuel expects to receive in exchange for transferring products and is generally based upon a negotiated price. FutureFuel sells its products directly to customers generally under agreements with payment terms of 30 to 75 days for chemical segment customers and 3 to 10 days for biofuel segment customers.
Contract Assets and Liabilities:
Contract assets consist of unbilled amounts typically resulting from revenue recognized through bill and hold arrangements. The contract assets are recorded as accounts receivable on the consolidated balance sheet. Contract liabilities consist of advance payments related to material rights. These amounts were historically recorded as deferred revenue which primarily related to upfront capital payments. The contract liabilities are recorded as deferred revenue in the consolidated balance sheets and are reduced as FutureFuel transfers product to the customer under the renewal option approach.
These contract assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
The following table reflects the changes in FutureFuel’s contract assets and contract liabilities.
Beginning balance January 1
Additions
Reductions
Ending balance March 31
Beginning balance at January 1
Revenue recognized
Ending balance at March 31
Transaction price allocated to the remaining performance obligations:
As of March 31, 2019, approximately $20,419 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 22% of this revenue is expected to be recognized over the next 12 months, and 78% is expected to be recognized between one and 5 years. These amounts are subject to change based upon changes in the estimated contract life and estimated quantities to be sold over the contract life.
We applied the practical expedient in ASC 606-10-50-14 and have excluded the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Disaggregation of revenue - contractual and non-contractual:
Contract revenue from customers with > 1 year arrangements
Contract revenue from customer with < 1 year arrangement
Revenue from non-contractual arrangements
BTC rebate
Total revenue
Timing of revenue:
Bill and hold revenue
Non-bill and hold revenue
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 and distribution. FutureFuel has elected to exclude from net sales any taxes which it collects concurrent with revenue-producing activities. These accounting policy elections are consistent with the manner in which FutureFuel historically recorded shipping and handling fees and taxes.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
All dollar amounts expressed as numbers in this M D&A are in thousands (except per share amounts).
Certain tables may not add due to rounding.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 Information” below for additional discussion regarding risks associated with forward-looking statements.
Overview
Our company is managed and reported in two reporting segments: chemicals segment and biofuels segment. Within the chemicals segment are two product groupings: custom chemicals and performance chemicals. The custom product group is comprised of specialty chemicals manufactured for a single customer whereas the performance product group is comprised of chemicals manufactured for multiple customers. The biofuels segment is comprised 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.
Summary of Financial Results
Set forth below is a summary of certain consolidated financial information for the periods indicated.
Dollar
%
Change
Revenues
Earnings per common share:
Capital expenditures and intangibles (net of customer reimbursements and regulatory grants)
Adjusted EBITDA
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 isolating the effects of certain items, including depreciation and amortization, which may vary among our operating segments without any correlation to their underlying operating performance, non-cash stock-based compensation expense, which is a non-cash expense that varies widely among similar companies, and gains and losses on derivative instruments, which can cause net income to appear volatile from period to period relative to the sale of the underlying physical product.
We enter into 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.
The following table reconciles adjusted EBITDA with net income, the most directly comparable GAAP performance financial measure.
Non-cash stock-based compensation
Non-cash interest expense (including amortization of deferred financing costs)
Losses on disposal of property and equipment
Losses on derivative instruments
Gains/(losses) on marketable securities
Income tax expense
The following table reconciles adjusted EBITDA with cash flows from operations, the most directly comparable GAAP liquidity financial measure.
Changes in operating assets and liabilities, net
Results of Operations
Consolidated
Volume/product mix effect
Price effect
Consolidated sales revenue in the three months ended March 31, 2019 decreased $7,246, compared to the three months ended March 31, 2018. This decrease primarily resulted from decreased sales volumes of biodiesel and to a lesser extent, reduced sales volumes of chemicals. This reduction was partially offset by a favorable price variance in the biofuels segment as compared to the same period in 2018. Sales revenue in the three months ended March 31, 2018 included rebates 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. Please see Note 2 for additional discussion.
Gross profit in the three months ended March 31, 2019 decreased $34,245, compared to the three months ended March 31, 2018. This decrease was primarily from the biofuel segment as the result of the retroactive reinstatement of the BTC in the same period of 2018 which was not in law in the current period. Also negatively impacting gross profit in the current period was reduced sales volumes in the biofuels segment and to a lesser extent, reduced sales volumes in the chemical segment. Furthermore, gross profit was negatively impacted by the change in the unrealized and realized activity in derivative instruments with a loss of $1,476 in the three months ended March 31, 2019 as compared to a loss of $162 in the same period of 2018.
Gross profit was favorably impacted in the three months ended March 31, 2019, as compared to the three months ended March 31, 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 $1,637 and $331 in the three months ended March 31, 2019 and 2018, respectively. This change in LIFO resulted in a lower of cost or market adjustment of $121 in the three months ended March 31, 2019 and no such adjustment was necessary in the three months ended March 31, 2018. Please see Note 3 for additional discussion.
Operating Expenses
Operating expenses decreased $889 in the three months ended March 31, 2019, as compared to the three ended March 31, 2018. This decrease was primarily from reduced compensation.
Provision for Income Taxes
Net Income
Net income for the three months ended March 31, 2019 decreased $30,327 as compared to the same period in 2018. The decrease was from decreased sales volumes and biodiesel tax credits and incentives that were reinstated in the three months ended March 31, 2018 that were not in effect for 2019 (see Note 2).
Chemicals Segment
Sales revenue in the three months ended March 31, 2019 decreased 6% or $1,729 compared to the three months ended March 31, 2018. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months ended March 31, 2019 totaled $23,700, an increase of $280 from the same period in 2018. This moderate increase was attributed to increased sales volumes of specialty polymer modifiers and dyes. Performance chemicals (comprised of multi-customer products which are sold based on specification) sales revenues were $3,652 in the three months ended March 31, 2019, a decrease of $2,009 from the three months ended March 31, 2018. This decrease was primarily from reduced glycerin sales and the timing of the sales of products we campaign.
Gross profit for the chemicals segment for the three months ended March 31, 2019 decreased $247 when compared to the same period of 2018. This decrease was driven mostly by product mix and the timing of material shipments.
Biofuels Segment
Biofuels sales revenue in the three months ended March 31, 2019 decreased $5,517 when compared to the same period of 2018. This decrease was primarily from reduced sales volume of biodiesel and biodiesel blends. Partially offsetting this decrease was an increased price variance as sales revenue in the three months ended March 31, 2018 included rebates that resulted from the retroactive reinstatement of the 2017 BTC. The BTC has not been reinstated beyond 2017. Please see Note 2 for additional discussion.
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 in the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
A portion of our biodiesel sold was to three major refiners/blenders in 2019 and to two major refiners/blenders in 2018. No assurances can be given that we will continue to sell to such major refiners/blenders, 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 customers 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) 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) the prices we receive from these customers are based upon then-market rates, as would be the case with sales of this commodity to other customers.
Biofuels gross profit in the three months ended March 31, 2019 decreased $33,998 when compared to the same period of 2018. Gross profit was benefited in the three months ended March 31, 2018 by the retroactive reinstatement of the 2017 BTC totaling $28,869. Gross profit was benefited to a greater extent in 2019 as compared to 2018 by the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment increased gross profit $1,110 in the three months ended March 31, 2019, compared to an increase of $143 in the three months ended March 31, 2018. This change in LIFO resulted in a lower of cost or market adjustment of $121 in the three months ended March 31, 2019. No such adjustment impacted gross profit in the three months ended March 31, 2018. Please see Note 3 for additional discussion.
Biofuels gross profit was also reduced by the change in the activity in derivative instruments in comparison to the same prior year period with a loss of $1,476 in the three months ended March 31, 2019 as compared to a loss of $162 in the three months ended March 31, 2018. In order to better manage the commodity price risk caused by market fluctuations in biofuel prices, we may enter into exchange traded commodity futures and options contracts. We account for these derivative instruments in accordance with accounting standards whereby the fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statement of operations as a component of cost of goods sold within the biofuels segment.
FutureFuel recognizes all derivative instruments as either assets or liabilities at fair value in its consolidated balance sheet. FutureFuel’s 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 due primarily to the extensive record keeping requirements.
The volumes and carrying values of FutureFuel’s derivative instruments were as follows:
*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 see Note 18 for additional discussion.
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 months ended March 31, 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. Sales revenue under bill and hold arrangements were $11,756 and $7,521 for the three months ended March 31, 2019 and 2018, respectively.
Liquidity and Capital Resources
Our net cash provided by (used in) operating activities, investing activities, and financing activities for the three months ended March 31, 2019 and 2018 are set forth in the following table.
Net cash from operating activities
Net cash from investing activities
Net cash from financing activities
Operating Activities
Cash from operating activities decreased from $3,840 of cash provided by operating activities in the first three months of 2018 to $3,289 of cash used in operating activities in the first three months of 2019. This decrease was primarily attributable to the decrease of $30,327 in net income, the decrease in the change in accounts payable, including accounts payable - related parties, of $15,023 offset by the decrease in the change in accounts receivable, including accounts receivable – related parties, of $43,344.
Investing Activities
Cash from investing activities decreased from $19,550 of cash provided by investing activities in the first three months of 2018 to $3,038 of cash used in investing activities in the first three months of 2019. Of this change, $20,464 was the result of increased cash outflows from net purchases of marketable securities in the first three months of 2019 compared to net sales in the first three months of 2018. Such net purchases totaled $1,387, in the first three months of 2019, compared to $19,077 in net sales in the first three months of 2018. Our capital expenditures and customer reimbursements for capital expenditures for the three months ended March 31, 2019 and 2018, are summarized in the following table:
Cash paid for capital expenditures and intangibles
Cash received as reimbursement of capital expenditures
Cash paid, net of reimbursement, for capital expenditures
Financing Activities
Cash used in financing activities of $2,624, was unchanged in the first three months of 2019 and 2018. This is the result of payments of dividends on our common stock in the first three months of 2019 and 2018.
Credit Facility
Effective April 16, 2015, we entered into a new $150,000 secured committed credit facility with a syndicated group of commercial banks. On May 25, 2016, we increased the facility $15,000. 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. See Note 7 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 quarter of 2019 and 2018, we paid a regular cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $2,624 in each period.
Capital Management
As a result of our initial equity offering, our subsequent positive operating results, the exercise of warrants, and the issuance of shares in our at-the-market offering, we accumulated excess working capital. Some of this excess working capital has been paid out as special and regular cash dividends. Additionally, regular cash dividends will be paid in 2019, 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 March 31, 2019 and December 31, 2018, 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 $84,459 and $79,888 at March 31, 2019 and December 31, 2018, 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 on our balance sheet at March 31, 2019 and December 31, 2018. Second, we hedge our biofuels feedstock through the execution of purchase contracts and supply agreements with certain vendors. These hedging transactions are recognized in earnings and were not recorded on our balance sheet at March 31, 2019 or December 31, 2018 because they do not meet the definition of a derivative 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 three months of 2019 or 2018. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the statement of operations as a component of cost of goods sold within the biodiesel segment.
Our immediate recognition of derivative instrument gains and losses can cause net income to be volatile from period to period due to the timing of the change in value of the derivative instruments relative to the volume of biofuel being sold. As of March 31, 2019 and December 31, 2018, the fair values of our derivative instruments were a net liability in the amount of $11 and $297, 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 comprised of crude corn oil and yellow grease and petrodiesel. The availability and price of these items are subject to wide fluctuations due to unpredictable factors such as weather conditions, overall economic conditions, governmental policies, commodity markets, and global supply and demand.
We prepared a sensitivity analysis of our exposure to market risk with respect to key raw materials and conversion costs for which we do not possess contractual market price adjustment protections, based on average prices for the first three months of 2019. 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
Biodiesel feedstock
LB
Methanol
We had no borrowings as of March 31, 2019 or December 31, 2018 and, as such, we were not exposed to interest rate risk for those periods. Due to the relative insignificance of transactions denominated in foreign currency, we consider our foreign currency risk to be immaterial.
Item 4. Controls and Procedures.
Under the supervision and with the participation of our chief executive officer and our principal financial officer and other senior management personnel, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and our principal financial officer have concluded that these disclosure controls and procedures as of March 31, 2019 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, 2018 filed with the SEC on March 15, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
Exhibit
11.
Statement re Computation of per Share Earnings
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- 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, 2018 and in our future filings made with the SEC. You should not place undue reliance on any forward-looking statements contained in this report which reflect our management’s opinions only as of their respective dates. Except as required by law, we undertake no obligation to revise or publicly release the results of any revisions to forward-looking statements. The risks and uncertainties described in this report and in subsequent filings with the SEC are not the only ones we face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that we currently believe are immaterial to our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If any such risks occur, our business, operating results, liquidity, and financial condition could be materially affected in an adverse manner. You should consult any additional disclosures we have made or will make in our reports to the SEC on Forms 10-K, 10-Q, and 8-K, and any amendments thereto. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FUTUREFUEL CORP.
By:
/s/ Paul A. Novelly
Paul A. Novelly, Chairman and Chief
Executive Officer
Date: May 10, 2019
/s/ Rose M. Sparks
Rose M. Sparks, Chief Financial Officer
and Principal Financial Officer
30