ff20180630_10q.htm
 

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 June 30, 2018

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Large accelerated filer   ☐  

 

Accelerated filer 

√ 

 

Non-accelerated filer  ☐  

 

Smaller reporting 

☐ 

 

(do not check if a smaller reporting company) 

 

company 

 

 

 

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 August 9, 2018: 43,742,677 

 

 

 

 

 

 

 

PART I FINANCIAL INFORMATION

   

Item 1. Financial Statements.

 

The following sets forth our unaudited consolidated balance sheet as of June 30, 2018, our audited consolidated balance sheet as of December 31, 2017, our unaudited consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2018 and 2017, and our unaudited consolidated statements of cash flows for the six-month periods ended June 30, 2018 and 2017.

 

FutureFuel Corp.

Consolidated Balance Sheets

As of June 30, 2018 and December 31, 2017

(Dollars in thousands)  

   

(Unaudited)

         
   

June 30, 2018

   

December 31, 2017

 

Assets

               

Cash and cash equivalents

  $ 199,921     $ 114,627  

Accounts receivable, net of allowances for bad debt of $0 and $0, at June 30, 2018 and December 31, 2017, respectively

    22,390       21,973  

Accounts receivable – related parties

    176       165  

Inventory

    47,521       43,754  

Income tax receivable

    3,481       6,937  

Prepaid expenses

    954       1,660  

Prepaid expenses – related parties

    12       12  

Marketable securities

    91,564       120,699  

Deferred financing costs

    144       144  

Other current assets

    789       387  

Total current assets

    366,952       310,358  

Property, plant and equipment, net

    105,098       109,735  

Intangible assets

    1,408       1,408  

Deferred financing costs

    108       180  

Other assets

    3,845       3,882  

Total noncurrent assets

    110,459       115,205  

Total Assets

  $ 477,411     $ 425,563  

Liabilities and Stockholders’ Equity

               

Accounts payable

  $ 34,712     $ 18,396  

Accounts payable – related parties

    781       1,183  

Deferred revenue – short-term

    5,692       2,736  

Dividends payable

    5,250       10,498  

Accrued expenses and other current liabilities

    7,052       2,468  

Total current liabilities

    53,487       35,281  

Deferred revenue – long-term

    17,142       16,522  

Other noncurrent liabilities

    1,129       1,115  

Noncurrent deferred income tax liability

    17,160       21,049  

Total noncurrent liabilities

    35,431       38,686  

Total liabilities

    88,918       73,967  

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, 43,742,677 and 43,741,670, issued and outstanding as of June 30, 2018 and December 31, 2017, respectively

    4       4  

Accumulated other comprehensive income

    145       8,433  

Additional paid in capital

    282,178       281,964  

Retained earnings

    106,166       61,195  

Total stockholders’ equity

    388,493       351,596  

Total Liabilities and Stockholders’ Equity

  $ 477,411     $ 425,563  

 

The accompanying notes are an integral part of these financial statements.

 

1

 

 

 

 

FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

For the Three and Six Months ended June 30, 2018 and 2017

(Dollars in thousands, except per share amounts)

(Unaudited) 

 

  

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Revenue

  $ 87,653     $ 67,972     $ 142,596     $ 121,620  

Revenues – related parties

    683       76       1,487       539  

Cost of goods sold

    73,218       60,227       85,357       104,381  

Cost of goods sold – related parties

    5,302       5,217       10,031       8,115  

Distribution

    1,498       769       2,817       1,658  

Distribution – related parties

    47       37       100       77  

Gross profit

    8,271       1,798       45,778       7,928  

Selling, general, and administrative expenses

                               

Compensation expense

    846       1,030       2,121       2,294  

Other expense

    596       505       1,006       1,085  

Related party expense

    205       44       278       100  

Research and development expenses

    784       845       1,966       1,600  
      2,431       2,424       5,371       5,079  

Income/(loss) from operations

    5,840       (626 )     40,407       2,849  

Interest and dividend income

    2,153       1,991       4,145       3,714  

Interest expense

    (43 )     (43 )     (86 )     (86 )

Gain/(loss) on marketable securities

    281       (438 )     (4,088 )     (569 )

Other expense

    (177 )     (2 )     (177 )     (33 )
      2,214       1,508       (206 )     3,026  

Income before income taxes

    8,054       882       40,201       5,875  

Provision/(benefit) for income taxes

    2,003       48       (1,676 )     1,645  

Net income

  $ 6,051     $ 834     $ 41,877     $ 4,230  
                                 

Earnings per common share

                               

Basic

  $ 0.14     $ 0.02     $ 0.96     $ 0.10  

Diluted

  $ 0.14     $ 0.02     $ 0.96     $ 0.10  

Weighted average shares outstanding

                               

Basic

    43,716,726       43,665,171       43,716,698       43,641,038  

Diluted

    43,720,942       43,675,688       43,721,568       43,649,400  
                                 

Comprehensive Income

                               

Net income

  $ 6,051     $ 834     $ 41,877     $ 4,230  

Other comprehensive income/(loss) from unrealized net

                               

  gains/(losses) on available-for-sale securities

    55       3,210       (19 )     6,096  

Income tax effect

    (12 )     (1,126 )     4       (2,137 )

Total unrealized gain/(loss), net of tax

    43       2,084       (15 )     3,959  

Comprehensive income

  $ 6,094     $ 2,918     $ 41,862     $ 8,189  

 

 

  

 

 

 

The accompanying notes are an integral part of these financial statements.     

 

2

 

 

 

 

 

FutureFuel Corp.  

Consolidated Statements of Cash Flows

For the Three and Six Months ended June 30, 2018 and 2017

(Dollars in thousands)

(Unaudited)

   

Six months ended June 30,

 
   

2018

   

2017

 

Cash flows provided by operating activities

               

Net income

  $ 41,877     $ 4,230  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation

    5,512       5,808  

Amortization of deferred financing costs

    72       72  

Benefit for deferred income taxes

    (3,885 )     (1,763 )

Change in fair value of equity securities

    6,412       -  

Change in fair value of derivative instruments

    (1,559 )     318  

Other than temporary impairment of marketable securities

    -       177  

Impairment of fixed assets

    171       9  

Gain on the sale of investments

    (2,324 )     392  

Stock based compensation

    214       750  

Losses on disposals of fixed assets

    37       77  

Noncash interest expense

    14       13  

Changes in operating assets and liabilities:

               

Accounts receivable

    (417 )     5,613  

Accounts receivable – related parties

    (11 )     (2,573 )

Inventory

    (3,767 )     15,204  

Income tax receivable

    3,456       4,262  

Prepaid expenses

    706       626  

Prepaid expenses – related parties

    -       (7 )

Accrued interest on marketable securities

    (82 )     (11 )

Other assets

    39       19  

Accounts payable

    16,316       (5,150 )

Accounts payable – related parties

    (402 )     525  

Accrued expenses and other current liabilities

    4,584       1,370  

Accrued expenses and other current liabilities – related parties

    -       (142 )

Deferred revenue

    (1,603 )     (1,972 )

Other noncurrent liabilities

    -       112  

Net cash provided by operating activities

    65,360       27,959  

Cash flows from investing activities

               

Collateralization of derivative instruments

    1,237       (34 )

Purchase of marketable securities

    (10,690 )     (19,322 )

Proceeds from the sale of marketable securities

    35,718       10,268  

Proceeds from the sale of fixed assets

    20       -  

Capital expenditures

    (1,103 )     (1,686 )

Net cash provided by/(used in) investing activities

    25,182       (10,774 )

Cash flows from financing activities

               

Minimum tax withholding on stock options exercised and awards vested

    -       (8 )

Excess tax benefits associated with stock options and awards

    -       (1 )

Payment of dividends

    (5,248 )     (105,438 )

Net cash used in financing activities

    (5,248 )     (105,447 )

Net change in cash and cash equivalents

    85,294       (88,262 )

Cash and cash equivalents at beginning of period

    114,627       199,272  

Cash and cash equivalents at end of period

  $ 199,921     $ 111,010  
                 

Cash paid for interest

  $ -     $ -  

Cash paid for income taxes

  $ 759     $ 55  

 

 

The accompanying notes are an integral part of these financial statements.  

 

 

3

 

 

 

 

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”), 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 business 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 2017 audited consolidated financial statements and should be read in conjunction with the 2017 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, 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 three and six months ended June 30, 2018.

 

Neither the BTC nor the Small Agri-biodiesel Producer Tax Credit have been passed into law for 2018.  

 

 

4

 

 

 Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

 

3 )

INVENTORY

 

The carrying values of inventory were as follows as of:  

 

   

June 30, 2018

   

December 31, 2017

 

At average cost (approximates current cost)

               

Finished goods

  $ 15,421     $ 22,998  

Work in process

    1,549       1,735  

Raw materials and supplies

    40,671       27,143  
      57,641       51,876  

LIFO reserve

    (10,120 )     (8,122 )

Total inventory

  $ 47,521     $ 43,754  

  

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 no LCM adjustment in the three and six months ended June 30, 2018.  For the three and six months ended June 30, 2017, the LCM adjustment was $957.

 

 

 

)

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 $3,109 and a gain of $524 for the three months ended June 30, 2018 and 2017, respectively, and a loss of $3,271 and a gain of $1,803 for the six months ended June 30, 2018 and 2017, respectively.

 

The volumes and carrying values of FutureFuel’s derivative instruments were as follows at:

 

 

   

June 30, 2018

   

December 31, 2017

 
   

Contract quantity

Short

   

Fair Value

   

Contract quantity

Short

   

Fair Value

 

Regulated options, included in other current assets

    100     $ (940 )     200     $ (2,428 )

Regulated fixed price future commitments, included in other current assets

    171     $ 71       -     $ -  

 

 

The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $1,423 and $2,660 at June 30, 2018 and December 31, 2017, respectively, and is 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

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

  

 

 

)

MARKETABLE SECURITIES

 

At June 30, 2018 and December 31, 2017, 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. Accordingly, debt securities were recorded at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity in the year ended December 31, 2017. For the six months ended, June 30, 2018, in accordance with ASC 321, the change in the fair value of equity securities was reported as (losses)/gains on marketable securities as a component of net income.

 

FutureFuel’s available for sale debt securities were comprised of the following at June 30, 2018 and December 31, 2017: 

 

   

June 30, 2018

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Exchange traded debt

  $ 1,429     $ 96     $ (9 )   $ 1,516  

Trust Preferred

    3,147       97       -       3,244  

Total debt securities

  $ 4,576     $ 193     $ (9 )   $ 4,760  
                                 
   

December 31, 2017

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Exchange traded debt

  $ 1,702     $ 158     $ -     $ 1,860  

Trust Preferred

    3,147       114       -       3,261  

Total debt securities

  $ 4,849     $ 272     $ -     $ 5,121  

 

 

The aggregate fair value of debt securities with unrealized losses totaled $297 at June 30, 2018, and the aggregate fair value of debt and equity securities with unrealized losses totaled $14,103 at December 31, 2017. As of June 30, 2018, FutureFuel had investments in debt securities with a total value of $168 that were in an unrealized loss position for a greater than a 12-month period. As of December 31, 2017, FutureFuel had investments in debt and equity securities with a total value of $2,903 that were in an unrealized loss position for a greater than 12-month period. The unrealized loss position for those securities was $7 and $124, respectively.  Those loss positions represented a minimal reduction for the securities and are expected to fully recover given changes in market value.

 

 

 

)

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities, including those associated with related parties, consisted of the following at:   

 

   

June 30, 2018

   

December 31, 2017

 

Accrued employee liabilities

  $ 4,681     $ 976  

Accrued property, franchise, motor fuel and other taxes

    1,948       1,387  

Other

    423       105  

Total

  $ 7,052     $ 2,468  

 

  

 

6

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

)

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

 

 

 

 

1.25%

 

 

 

0.25%

 

 

 

0.15%

 

≥ 1.00:1.0

And

< 1.50:1.0

 

 

1.50%

 

 

 

0.50%

 

 

 

0.20%

 

≥ 1.50:1.0

And

< 2.00:1.0

 

 

1.75%

 

 

 

0.75%

 

 

 

0.25%

 

≥ 2.00:1.0

And

< 2.50:1.0

 

 

2.00%

 

 

 

1.00%

 

 

 

0.30%

 

≥ 2.50:1.0

 

 

 

 

2.25%

 

 

 

1.25%

 

 

 

0.35%

 

 

 

The terms of the Credit Facility contain certain covenants and conditions including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and a minimum liquidity requirement. FutureFuel was in compliance with such covenants as of June 30, 2018.

 

There were no borrowings under this credit agreement at June 30, 2018 or December 31, 2017.

 

 

 

)

PROVISION/(BENEFIT) FOR INCOME TAXES

 

The following table summarizes the provision/(benefit) for income taxes.

   

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

(Benefit)/provision for income taxes

  $ 2,003     $ 48     $ (1,676 )   $ 1,645  

Effective tax rate

    24.9 %     5.4 %     (4.2% )     28.0 %

 

 

The effective tax rate for the three months ended June 30, 2018 and 2017 reflects our expected tax rate on reported operating income before income tax. This three-month effective rate is expected to continue for the remainder of 2018.

 

The effective tax rate for the six months ended June 30, 2018 reflects our 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. Our effective tax rate in the six months ended June 30, 2017 does not reflect the BTC and Small Agri-biodiesel Producer Tax Credit recognized in 2018 because these credits and incentives were retroactively extended through December 31, 2017 on February 9, 2018.  This rate is not expected to continue for the remainder of 2018 as these credits only benefited the three months ended March 31, 2018 and six months ended June 30, 2018.

.

 

7

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

 

Unrecognized tax benefits totaled $0 at June 30, 2018 and December 31, 2017.

 

FutureFuel records interest and penalties, net, as a component of income tax expense. At June 30, 2018 and December 31, 2017, FutureFuel recorded $0 in accruals for interest or tax penalties.

 

 

 

)

EARNINGS PER SHARE

 

The Company computes 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 non-vested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. The Company had no other participating securities at June 30, 2018 or 2017.

 

Contingently issuable shares associated with outstanding service-based restricted stock units were not included in the earnings per share calculations for the three-month periods ended June 30, 2018 or 2017 as the vesting conditions had not been satisfied.

 

Basic and diluted earnings per common share were computed as follows: 

 

 

 

   

For the three months ended June 30,

   

For the six months ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Numerator:

                               

Net income

  $ 6,051     $ 834     $ 41,877     $ 4,230  

Less: distributed earnings allocated to non-vested stock

    -       -       -       -  

Less: undistributed earnings allocated to non-vested restricted stock

    (3 )     (1 )     (24 )     (10 )

Numerator for basic earnings per share

  $ 6,048     $ 833     $ 41,853     $ 4,220  

Effect of dilutive securities:

                               

Add: undistributed earnings allocated to non-vested restricted stock

    3       1       24       10  

Less: undistributed earnings reallocated to non-vested restricted stock

    (3 )     (1 )     (24 )     (10 )

Numerator for diluted earnings per share

  $ 6,048     $ 833     $ 41,853     $ 4,220  

Denominator:

                               

Weighted average shares outstanding – basic

    43,716,726       43,665,171       43,716,698       43,641,038  

Effect of dilutive securities:

                               

Stock options and other awards

    4,216       10,517       4,870       8,362  

Weighted average shares outstanding – diluted

    43,720,942       43,675,688       43,721,568       43,649,400  
                                 

Basic earnings per share

  $ 0.14     $ 0.02     $ 0.96     $ 0.10  

Diluted earnings per share

  $ 0.14     $ 0.02     $ 0.96     $ 0.10  

 

 

 

 

 

8

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Certain options to purchase FutureFuel’s common stock were not included in the computation of diluted earnings per share for the three and six months ended June 30, 2018 and 2017 because they were anti-dilutive in the periods. The weighted average number of options excluded on this basis was 30,000 and 30,000 for the three-months and six-months ended June 30, 2018, respectively.  The weighted average number of options excluded on this basis was 0 and 15,000 for the three-months and six-months ended June 30, 2017, respectively. 

 

 

 

 

10 )

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 business segment primarily manufactures and markets biodiesel. Biodiesel revenues are generated through the sale of biodiesel to customers through FutureFuel’s distribution network at the Batesville Plant, through distribution facilities available at leased oil storage facilities, and through a network of remotely located tanks. Biofuels revenues also include the sale of biodiesel blends with petrodiesel, petrodiesel with no biodiesel added, internally generated, separated 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: 
 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

United States

  $ 87,525     $ 66,918     $ 142,791     $ 120,333  

All Foreign Countries

    811       1,130       1,292       1,826  

Total

  $ 88,336     $ 68,048     $ 144,083     $ 122,159  

 

Revenues from a single foreign country during the three and six months ended June 30, 2018 and 2017 did not exceed 1% of total revenues.    

 

 

9

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

Summary of business by segment

 

   

Three months ended June 30,

Six months ended June 30,

 
   

2018

   

2017

       

2018

   

2017

 

Revenue

                                   

Custom chemicals

  $ 27,072     $ 19,644         $ 50,492     $ 41,596  

Performance chemicals

    4,455       3,707           10,116       8,112  

Chemicals revenue

    31,527       23,351           60,608       49,708  

Biofuels revenue

    56,809       44,697           83,475       72,451  

Total Revenue

  $ 88,336     $ 68,048         $ 144,083     $ 122,159  
                                     

Segment gross profit

                                   

Chemicals

  $ 8,016     $ 5,332         $ 15,572     $ 12,341  

Biofuels

    255       (3,534 )         30,206       (4,413 )

Total gross profit

    8,271       1,798           45,778       7,928  

Corporate expenses

    (2,431 )     (2,424 )         (5,371 )     (5,079 )

Income before interest and taxes

    5,840       (626 )         40,407       2,849  

Interest and other income

    2,434       1,991           4,145       3,714  

Interest and other expense

    (220 )     (483 )         (4,351 )     (688 )

(Provision)/benefit for income taxes

    (2,003 )     (48 )         1,676       (1,645 )

Net income

  $ 6,051     $ 834         $ 41,877     $ 4,230  

 

 

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.

 

 

 

11 )

 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.

 

 

10

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The following tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis, at June 30, 2018 and December 31, 2017.

 

   

Asset (Liability)

 
           

Fair Value Measurements Using

 
   

Fair Value at

   

Inputs Considered as:

 

Description

 

June 30, 2018

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ (869 )   $ (869 )   $ -     $ -  

Preferred stock, and other equity instruments

  $ 86,804     $ 86,804     $ -     $ -  

Trust preferred and exchange traded debt instruments

  $ 4,760     $ 4,760     $ -     $ -  
                                 
   

Asset (Liability)

 
           

Fair Value Measurements Using

 
   

Fair Value at

   

Inputs Considered as:

 

Description

 

December 31, 2017

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ (2,428 )   $ (2,428 )   $ -     $ -  

Preferred stock, and other equity instruments

  $ 115,578     $ 115,578     $ -     $ -  

Trust preferred and exchange traded debt instruments

  $ 5,121     $ 5,121     $ -     $ -  

 

 

 

12 )

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 and six months ended June 30, 2018 and 2017. 

 

Changes in Accumulated Other Comprehensive Income From Unrealized

 

Gains and Losses on Available-for-Sale Securities

 

For the three months ended June 30, 2018 and 2017

 

(net of tax)

 
   

2018

   

2017

 

Balance at April 1

  $ 102     $ 5,415  

Other comprehensive income before reclassifications

    43       1,799  

Amounts reclassified from accumulated other comprehensive income

    -       285  

Net current-period other comprehensive income

    43       2,084  

Balance at June 30

  $ 145     $ 7,499  
                 
                 

Changes in Accumulated Other Comprehensive Income From Unrealized

 

Gains and Losses on Available-for-Sale Securities

 

For the six months ended June 30, 2018 and 2017

 

(net of tax)

 
   

2018

   

2017

 

Balance at January 1[1]

  $ 160     $ 3,540  

Other comprehensive income before reclassifications

    (15 )     3,589  

Amounts reclassified from accumulated other comprehensive income

    -       370  

Net current-period other comprehensive income

    (15 )     3,959  

Balance at June 30

  $ 145     $ 7,499  

 

[1] The beginning balance for 2018 was decreased $8,273 to reflect the impact of the adoption of ASU 2016-01. See Note 18 for additional information.

 

 

 

11

 

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The following tables summarize amounts reclassified from accumulated other comprehensive income in the three and six months ended June 30, 2018 and 2017: 

 

 

Reclassifications from Accumulated Other

Comprehensive Income for the three and six months ended

June 30, 2018 and 2017

                   
   

Three months ended June 30,

   
   

2018

   

2017

 

Affected Line Item in Statement of Operations

Unrealized losses on available-for-sale debt securities

  $ -     $ (438 )

Gain/(loss) on marketable securities

Total before tax

    -       (438 )  

Tax (provision)/benefit

    -       153    

Total reclassifications

  $ -     $ (285 )  
                   
   

Six months ended June 30,

   
   

2018

   

2017

 

Affected Line Item in Statement of Operations

Unrealized losses on available-for-sale debt securities

  $ -     $ (569 )

Gain/(loss) on marketable securities

Total before tax

    -       (569 )  

Tax benefit

    -       199    

Total reclassifications

  $ -     $ (370 )  

 

*Effective January 1, 2018, FutureFuel’s unrealized gains/(losses) on available-for-sale securities includes debt securities only in accordance with ASC 320 and ASC 321.  The prior year was not restated under the modified retrospective approach in adoption of ASC 321. Please see Note 18 for further details on the adoption of this standard.

 

 

 

13 )

 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.

 

 

 

14 )

 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.

 

 

 

 

 

12

 

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

15 )

 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 June 30, 2018 and December 31, 2017. FutureFuel tests the intangible asset for impairment in accordance with ASC 350-30-35-18 through 35-20. 

 

 

 

 16 )

 RECENTLY ISSUED ACCOUNTING STATEMENTS

 

The following table provides a brief description of recent Accounting Standard Updates ("ASU") issued by the FASB:

 

 

 

 

 

 

 

Standard

 

Description

 

Effective Date

 

Effect on the Financial Statements or Other Significant Matters

In February 2016, the FASB issued ASU 2016-02, Leases.

 

The new guidance supersedes the lease guidance under FASB ASC Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. The guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases.

 

Annual periods beginning after December 15, 2018. Early adoption is permitted.

 

The Company is currently evaluating its population of leases, and is continuing to assess all potential impacts of the standard, but currently believes the most significant impact relates to its accounting for logistics equipment. The Company anticipates recognition of additional assets and corresponding liabilities related to leases upon adoption. The Company plans to adopt the standard effective January 1, 2019.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income.

 

The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act passed by congress on December 22, 2017 and certain disclosures related to those stranded tax effects.

 

Annual periods beginning after December 15, 2018. Early adoption is permitted.

 

The Company is currently evaluating the impact of this standard. The Company plans to adopt the standard on or before January 1, 2019.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting.

 

This Update is part of the FASB Simplification Initiative. Under the new standard, Topic 718 is expanded to include the nonemployee share-based payments. As a result, companies will no longer be required to value non-employee awards differently from employee awards. This means that companies will value all equity classified awards at their grant-date under ASC Topic 718 and forgo revaluing the award after that date as currently required under Subtopic 505-50.

 

Annual periods beginning after December 15, 2018. Early adoption is permitted.

 

The Company believes the adoption of the standard will have minimal impact on our financial statements. The Company plans to adopt the standard effective January 1, 2019.

 

  

 

13

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

17 ) REVENUE RECOGNITION

 

On January 1, 2018, FutureFuel adopted ASU 2014-09 Revenue Recognition (“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 will be updated quarterly on a prospective basis. In applying the cumulative effect of Topic 606 as of January 1, 2018, FutureFuel recorded a gross reduction to opening retained earnings of $6,900 and a net of tax reduction of $5,178. Additionally, the adoption of Topic 606 resulted in one contract recognizing revenue on a bill and hold basis, whereas under Topic 605 it was recognized at point of shipment. The adoption of Topic 606 also increased short term deferred revenue $3,251 and long term deferred revenue $3,293 and reduced inventory $356 as of January 1, 2018.

 

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. For these short term contracts, there was no material change in recognizing revenue under Topic 606 and Topic 605.

 

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.

 

 

 

 

14

 

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

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 for the three and six months ended June 30, 2018. There were no contract assets recognized under Topic 605:

 

Contract assets - short-term (included in accounts receivable)

 
   

Three months ended

June 30, 2018

 

Beginning balance at March 31, 2018

  $ 651  

Additions

    1,110  

Reductions

    (651 )

Ending balance at June 30, 2018

  $ 1,110  
   

Six months

ended

June 30, 2018

 

Beginning balance at January 1, 2018

  $ 505  

Additions

    1,761  

Reductions

    (1,156 )

Ending balance at June 30, 2018

  $ 1,110  

 

   

As Reported

   

Under Prior

Standard

   

Contract Liabilities

 

Topic 606

   

Topic 605

   

Change

 

Current

                       

Beginning balance at March 31, 2018

  $ 5,650     $ 2,529     $ 3,121  

Revenue recognized for the three months ended June 30, 2018

    (165 )     (24 )     (141 )

Ending balance at June 30, 2018

    5,485       2,505       2,980  
                         

Beginning balance at January 1, 2018

    5,780       2,529       3,251  

Revenue recognized for the six months ended June 30, 2018

    (295 )     (24 )     (271 )

Ending balance at June 30, 2018

  $ 5,485     $ 2,505     $ 2,980  
                         

Long term

                       

Beginning balance at March 31, 2018

  $ 13,843     $ 11,308     $ 2,535  

Additions

    458       458       -  

Revenue recognized for the three months ended June 30, 2018

    (1,631 )     (1,173 )     (458 )

Ending balance at June 30, 2018

    12,670       10,593       2,077  
                         

Beginning balance at January 1, 2018

    15,233       11,940       3,293  

Additions

    458       458       -  

Revenue recognized for the six months ended June 30, 2018

    (3,021 )     (1,805 )     (1,216 )

Ending balance at June 30, 2018

  $ 12,670     $ 10,593     $ 2,077  

 

 

Transaction price allocated to the remaining performance obligations

 

As of June 30, 2018, approximately $18,155 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 30% of this revenue is expected to be recognized over the next 12 months, and 70% 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.

 

 

 

15

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

We applied the practical expedient in ASC 606-10-50-14 and have excluded the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

 

Disaggregation of revenue – contractual and non-contractual

   

Three months ended June 30,

 

Six months ended June 30,

 
   

2018

   

2017(a)

     

2018

   

2017 (a)

 

Contract revenue from customers with > 1 year arrangements

  $ 17,908     $ 11,973       $ 33,158     $ 25,927  

Contract revenue from customers with < 1 year arrangement

    70,373       56,007         124,414       96,122  

Revenue from non-contractual arrangements

    55       68         110       110  

BTC rebate

    -                 (13,599 )        

Total revenue

  $ 88,336     $ 68,048       $ 144,083     $ 122,159  

 

Timing of Revenue

   

Three months ended June 30,

 

Six months ended June 30,

 
   

2018

   

2017(a)

     

2018

   

2017(a)

 

Bill and hold revenue

  $ 13,373     $ 3,460       $ 20,894     $ 7,958  

Non-bill and hold revenue

    74,963       64,588         123,189       114,201  

Total revenue

  $ 88,336     $ 68,048       $ 144,083     $ 122,159  

 

 

(a)

Prior periods have not been adjusted under the modified retrospective method for Topic 606.

 

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.

 

The following table summarizes the impacts of Topic 606 adoption on the Company’s consolidated statement of operations and comprehensive income for the three and six months ended June 30, 2018.

 

 

   

Three months ended June 30, 2018

 
   

Balances Prior to Adoption of

Topic 606

   

Adjustments

   

As Reported

 
                         

Revenue

  $ 86,595     $ 1,058     $ 87,653  

Cost of goods sold

    72,915       303       73,218  

Gross profit

    7,516       755       8,271  

Income from operations

    5,085       755       5,840  

Income before income taxes

    7,299       755       8,054  

(Benefit)/provision for income taxes

    1,814       189       2,003  

Net income

  $ 5,485     $ 566     $ 6,051  

Basic earnings per share

  $ 0.13     $ 0.01     $ 0.14  

Diluted earnings per share

  $ 0.13     $ 0.01     $ 0.14  

Comprehensive income

  $ 5,528     $ 566     $ 6,094  

 

 

 

 

 

16

 

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

   

Six months ended June 30, 2018

 
   

Balances Prior to Adoption of

Topic 606

   

Adjustments

   

As Reported

 
                         

Revenue

  $ 139,999     $ 2,597     $ 142,596  

Cost of goods sold

    84,944       413       85,357  

Gross profit

    43,594       2,184       45,778  

Income from operations

    38,223       2,184       40,407  

Income before income taxes

    38,017       2,184       40,201  

(Benefit)/provision for income taxes

    (2,165 )     489       (1,676 )

Net income

  $ 40,182     $ 1,695     $ 41,877  

Basic earnings per share

  $ 0.92     $ 0.04     $ 0.96  

Diluted earnings per share

  $ 0.92     $ 0.04     $ 0.96  

Comprehensive income

  $ 40,167     $ 1,695     $ 41,862  

 

The following table summarizes the impacts of Topic 606 adoption on the Company’s consolidated balance sheet which has been adjusted for the adoption of Topic 606 as of June 30, 2018.

 

   

Balances Prior

                 
   

to Adoption of

                 
   

Topic 606

   

Adjustments

   

As Reported

 

Accounts receivable

  $ 21,280     $ 1,110     $ 22,390  

Inventory

    48,289       (768 )     47,521  

Income tax receivable

    3,513       (32 )     3,481  

Total current assets

    366,642       310       366,952  

Total assets

    477,101       310       477,411  

Deferred revenue - short term

    2,712       2,980       5,692  

Total current liabilities

    50,507       2,980       53,487  

Deferred revenue - long term

    15,065       2,077       17,142  

Noncurrent deferred income tax liability

    18,424       (1,264 )     17,160  

Total noncurrent liabilities

    34,618       813       35,431  

Total liabilities

    85,125       3,793       88,918  

Retained earnings

    109,649       (3,483 )     106,166  

Total stockholders' equity

    391,976       (3,483 )     388,493  

Total liabilities and stockholders' equity

  $ 477,101     $ 310     $ 477,411  

 

 

The following table summarizes the impacts of our adoption of Topic 606 on the Company’s consolidated statement of cash flows for the six months ended June 30, 2018:

 

   

Balances Prior  

           
   

to Adoption of

           

 As Reported

 
   

Topic 606

   

Adjustments

   

or Restated

 

Change in net income

  $ 40,182     $ 1,695     $ 41,877  

Benefit for deferred income taxes

    (2,621 )     (1,264 )     (3,885 )

Changes in operating assets and liabilities:

                       

Accounts receivables

    693       (1,110 )     (417 )

Inventory

    (4,528 )     768       (3,760 )

Income tax receivable

    3,424       32       3,456  

Deferred revenue

    (1,482 )     (121 )     (1,603 )

Net cash provided by operating activities

  $ 65,360     $ -     $ 65,360  

 

 

 

 

 

17

 

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

18 ) CHANGE IN ACCOUNTING PRINCIPLE AND ERROR CORRECTIONS

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. One provision of this update requires that equity investments, except those accounted for under the equity method or resulting in consolidation, be measured at fair value and changes in fair value recognized in net income. The provisions of this update are recognized as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. For public entities, this guidance was effective for years beginning after December 15, 2017, including interim periods within those years.

 

The new accounting standard related to the recognition and measurement of financial assets and liabilities makes the following changes to prior guidance and requires:

 

 

certain equity investments to be measured at fair value with changes in fair value now recognized in net income. However, equity investments that do not have readily determinable fair values may be measured at cost minus

impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer;

 

a qualitative assessment of equity investments without readily determinable fair values to identify impairment; and

 

separate presentation of financial assets and financial liabilities by measurement category and form of financial

asset on the balance sheet or in the accompanying notes to the financial statements.

 

We adopted the new accounting standard utilizing the modified retrospective method, and, therefore, no adjustments were made to amounts in our prior period financial statements. We recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of retained earnings by $13,139 on a pre-tax basis ($8,273 after-tax) related to the net impact of unrealized gains and losses primarily on equity securities and preferred stock.

 

   

Three months ended June 30,

 

Six months ended June 30,

 
   

2018

      2017*       2018       2017*  

Net gains/(losses) recognized on equity securities

  $ 281     $ (438 )   $ (4,088 )   $ (569 )

Less: net gains/(losses) recognized during the period

on equity securities sold during the period

    663       (438 )     2,324       (569 )

Unrealized gains/(losses) during the reporting period

on equity securities held at the reporting date

  $ (382 )   $ -     $ (6,412 )   $ -  

 

*Prior periods have not been adjusted under the modified retrospective method for Topic 321.

 

For the three months ended March 31, 2018, the Company had failed to adopt the standard and presented the unrealized loss on equity investments as a change in accumulated other comprehensive income within the equity section of the Consolidated Balance Sheets. Within the six-month period, the Company corrected the first quarter of 2018, by recording $5,744 of unrealized pre-tax losses ($4,528, net of tax) on equity securities from accumulated other comprehensive income to net income. The restated balances ended March 31, 2018 were as follows:

 

 

 

 

 

 

 

18

 

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

           

Adjustment

       
           

for Adoption

       

Balance sheet impact to previously reported period

 

As Reported

   of Topic 321  

As Recast

 

Liabilities and stockholders' equity

                       

Additional other comprehensive income

  $ 3,847     $ (3,745 )   $ 102  

Retained earnings

    96,371       3,745       100,116  
                         

Income statement impact to previously reported period

                       

Gain/(loss) on marketable securities

  $ 1,375     $ (5,744 )   $ (4,369 )

Income before income taxes

    37,891       (5,744 )     32,147  

(Benefit)/provision for income taxes

    (2,463 )     (1,216 )     (3,679 )

Net income

    40,354       (4,528 )     35,826  

Earnings per common share, basic and diluted:

    0.92       (0.10 )     0.82  

Other comprehensive income from unrealized net gain on available for sale securities

    (5,818 )     5,744       (74 )

Income tax effect

    1,232       (1,216 )     16  

Total unrealized (loss)/gain, net of tax

    (4,586 )     4,528       (58 )
                         

Cash flow impact provided by operating activities

                       

Net income

  $ 40,354     $ (4,528 )   $ 35,826  

Benefit for deferred income taxes

    (2,388 )     (1,216 )     (3,604 )

Change in fair value of equity securities

    -       6,030       6,030  

Other than temporary impairment of marketable securities

    286       (286 )     -  

 

 

With adoption of the Topic 321, the prior period change in net gains/(losses) was as follows:

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Net losses recognized on equity securities

  $ (4,369 )   $ (131 )

Less: net gains recognized during the period on equity securities sold during the period

    1,661       (131 )

Unrealized losses during the reporting period on equity securities held at the reporting date

  $ (6,030 )   $ -  

 

 

 

 

 

 

 

 

 

 

  

19

 

 

 

 

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. 

 

   

Three months ended June 30,

 
                   

Dollar

   

%

 
   

2018

   

2017

   

Change

   

Change

 

Revenues

  $ 88,336     $ 68,048     $ 20,288       29.8 %

Income from operations

  $ 5,840     $ (626 )   $ 6,466       1,032.9 %

Net income

  $ 6,051     $ 834     $ 5,217       625.5 %

Earnings per common share:

                               

Basic

  $ 0.14     $ 0.02     $ 0.12       600.0 %

Diluted

  $ 0.14     $ 0.02     $ 0.12       600.0 %

Capital expenditures and intangibles (net of customer reimbursements and regulatory grants)

  $ 536     $ 715     $ (179 )     (25.0 %)

Adjusted EBITDA

  $ 11,667     $ 2,079     $ 9,588       461.3 %
                                 
   

Six months ended June 30,

 
                   

Dollar

   

%

 
   

2018

   

2017

   

Change

   

Change

 

Revenues

  $ 144,083     $ 122,159     $ 21,924       17.9 %

Income from operations

  $ 40,407     $ 2,849     $ 37,558       1,318.3 %

Net income

  $ 41,877     $ 4,230     $ 37,647       890.0 %

Earnings per common share:

                               

Basic

  $ 0.96     $ 0.10     $ 0.86       860.0 %

Diluted

  $ 0.96     $ 0.10     $ 0.86       860.0 %

Capital expenditures and intangibles (net of customer reimbursements and regulatory grants)

  $ 897     $ 1,557     $ (660 )     (42.4 %)

Adjusted EBITDA

  $ 49,264     $ 7,648     $ 41,616       544.1 %

 

 

 

 

20

 

 

 

 

   

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. 

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Adjusted EBITDA

  $ 11,667     $ 2,079     $ 49,264     $ 7,648  

Depreciation

    (2,756 )     (2,912 )     (5,512 )     (5,808 )

Non-cash stock-based compensation

    (107 )     (273 )     (214 )     (750 )

Interest and dividend income

    2,153       1,991       4,145       3,714  

Non-cash interest expense

    (43 )     (43 )     (86 )     (86 )

Losses on disposal of property and equipment

    (32 )     (46 )     (37 )     (77 )

(Losses)/gains on derivative instruments

    (3,109 )     524       (3,271 )     1,803  

Gains/(losses) on marketable securities

    281       (438 )     (4,088 )     (569 )

Income tax (provision)/benefit

    (2,003 )     (48 )     1,676       (1,645 )

Net income

  $ 6,051     $ 834     $ 41,877     $ 4,230  

 

  

 

21

 

 

 

 

The following table reconciles adjusted EBITDA with cash flows from operations, the most directly comparable GAAP liquidity financial measure.

 

   

Six months ended June 30,

 
   

2018

   

2017

 

Adjusted EBITDA

  $ 49,264     $ 7,648  

Benefit for deferred income taxes

    (3,885 )     (1,763 )

Impairment of fixed assets

    171       9  

Interest and dividend income

    4,145       3,714  

Income tax benefit/(expense)

    1,676       (1,645 )

Gains/(losses) on derivative instruments

    (3,271 )