ff20180930_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 September 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Large accelerated filer   ☐  

 

Accelerated filer 

√ 

 

Non-accelerated filer  ☐  

 

Smaller reporting company 

☐ 

 

(do not check if a 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 November 9, 2018: 43,743,243 

 

 

 

 

 

PART I FINANCIAL INFORMATION

   

Item 1. Financial Statements.

 

The following sets forth our unaudited consolidated balance sheet as of September 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 nine-month periods ended September 30, 2018 and 2017, and our unaudited consolidated statements of cash flows for the nine-month periods ended September 30, 2018 and 2017.

 

FutureFuel Corp.

Consolidated Balance Sheets

As of September 30, 2018 and December 31, 2017

(Dollars in thousands)

 

   

(Unaudited)

         
   

September 30, 2018

   

December 31, 2017

 

Assets

               

Cash and cash equivalents

  $ 199,348     $ 114,627  

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

    18,942       21,973  

Accounts receivable – related parties

    2,547       165  

Inventory

    48,005       43,754  

Income tax receivable

    479       6,937  

Prepaid expenses

    470       1,660  

Prepaid expenses – related parties

    12       12  

Marketable securities

    103,102       120,699  

Deferred financing costs

    144       144  

Other current assets

    677       387  

Total current assets

    373,726       310,358  

Property, plant and equipment, net

    104,254       109,735  

Intangible assets

    1,408       1,408  

Deferred financing costs

    72       180  

Other assets

    3,745       3,882  

Total noncurrent assets

    109,479       115,205  

Total Assets

  $ 483,205     $ 425,563  

Liabilities and Stockholders’ Equity

               

Accounts payable

  $ 31,414     $ 18,396  

Accounts payable – related parties

    3,132       1,183  

Deferred revenue – short-term

    7,114       2,736  

Dividends payable

    2,626       10,498  

Accrued expenses and other current liabilities

    7,853       2,468  

Total current liabilities

    52,139       35,281  

Deferred revenue – long-term

    14,651       16,522  

Other noncurrent liabilities

    1,137       1,115  

Noncurrent deferred income tax liability

    17,430       21,049  

Total noncurrent liabilities

    33,218       38,686  

Total liabilities

    85,357       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, 43,743,243 and 43,741,670, issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

    4       4  

Accumulated other comprehensive income

    124       8,433  

Additional paid in capital

    282,109       281,964  

Retained earnings

    115,611       61,195  

Total stockholders’ equity

    397,848       351,596  

Total Liabilities and Stockholders’ Equity

  $ 483,205     $ 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 Nine Months ended September 30, 2018 and 2017

(Dollars in thousands, except per share amounts)

(Unaudited)

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Revenue

  $ 80,588     $ 77,106     $ 223,184     $ 198,726  

Revenues – related parties

    834       500       2,321       1,039  

Cost of goods sold

    61,559       61,088       146,916       165,469  

Cost of goods sold – related parties

    5,651       9,880       15,682       17,995  

Distribution

    1,512       1,072       4,329       2,730  

Distribution – related parties

    47       40       147       117  

Gross profit

    12,653       5,526       58,431       13,454  

Selling, general, and administrative expenses

                               

Compensation expense

    933       876       3,054       3,170  

Other expense

    476       477       1,482       1,562  

Related party expense

    138       38       416       138  

Research and development expenses

    877       935       2,843       2,535  
      2,424       2,326       7,795       7,405  

Income from operations

    10,229       3,200       50,636       6,049  

Interest and dividend income

    2,543       1,965       6,688       5,679  

Interest expense

    (43 )     (43 )     (129 )     (129 )

Gain/(loss) on marketable securities

    815       26       (3,273 )     (543 )

Other expense

    (87 )     (84 )     (264 )     (117 )
      3,228       1,864       3,022       4,890  

Income before income taxes

    13,457       5,064       53,658       10,939  

Provision for income taxes

    4,012       1,730       2,336       3,375  

Net income

  $ 9,445     $ 3,334     $ 51,322     $ 7,564  
                                 

Earnings per common share

                               

Basic

  $ 0.22     $ 0.08     $ 1.17     $ 0.17  

Diluted

  $ 0.22     $ 0.08     $ 1.17     $ 0.17  

Weighted average shares outstanding

                               

Basic

    43,724,195       43,705,234       43,719,215       43,662,672  

Diluted

    43,732,920       43,714,753       43,725,370       43,671,420  
                                 

Comprehensive Income

                               

Net income

  $ 9,445     $ 3,334     $ 51,322     $ 7,564  

Other comprehensive income/(loss) from unrealized net gains/(losses) on available-for-sale debt securities

    (27 )     1,006       (46 )     7,102  

Income tax effect

    6       (353 )     10       (2,490 )

Total unrealized gains/(losses), net of tax

    (21 )     653       (36 )     4,612  

Comprehensive income

  $ 9,424     $ 3,987     $ 51,286     $ 12,176  

 

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

 

2

 

 

 

FutureFuel Corp.  

Consolidated Statements of Cash Flows

For the Three and Nine Months ended September 30, 2018 and 2017

(Dollars in thousands)

(Unaudited)

 

   

Nine months ended September 30,

 
   

2018

   

2017

 

Cash flows provided by operating activities

               

Net income

  $ 51,322     $ 7,564  

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

               

Depreciation

    8,244       8,735  

Amortization of deferred financing costs

    108       109  

Benefit for deferred income taxes

    (3,609 )     (1,303 )

Change in fair value of equity securities

    5,597       -  

Change in fair value of derivative instruments

    (2,290 )     (60 )

Other than temporary impairment of marketable securities

    -       177  

Impairment of fixed assets

    258       28  

(Gain)/loss on the sale of investments

    (2,324 )     366  

Stock based compensation

    321       878  

Loss on disposal of fixed assets

    41       145  

Noncash interest expense

    22       20  

Changes in operating assets and liabilities:

               

Accounts receivable

    3,031       3,081  

Accounts receivable – related parties

    (2,382 )     (1,181 )

Inventory

    (4,251 )     8,570  

Income tax receivable

    6,458       5,546  

Prepaid expenses

    1,190       1,152  

Prepaid expenses – related parties

    -       (4 )

Accrued interest on marketable securities

    9       22  

Other assets

    (256 )     37  

Accounts payable

    13,018       1,425  

Accounts payable – related parties

    1,949       2,780  

Accrued expenses and other current liabilities

    5,385       1,587  

Accrued expenses and other current liabilities – related parties

    -       (142 )

Deferred revenue

    (2,672 )     (3,220 )

Other noncurrent liabilities

    -       128  

Net cash provided by operating activities

    79,169       36,440  

Cash flows from investing activities

               

Collateralization of derivative instruments

    2,384       (760 )

Purchase of marketable securities

    (19,664 )     (25,795 )

Proceeds from the sale of marketable securities

    33,942       14,913  

Proceeds from the sale of fixed assets

    22       4  

Capital expenditures

    (3,084 )     (2,614 )

Net cash provided by/(used in) investing activities

    13,600       (14,252 )

Cash flows from financing activities

               

Minimum tax withholding on stock options exercised and awards vested

    (176 )     (121 )

Excess tax benefits associated with stock options and awards

    -       (31 )

Payment of dividends

    (7,872 )     (108,063 )

Net cash used in financing activities

    (8,048 )     (108,215 )

Net change in cash and cash equivalents

    84,721       (86,027 )

Cash and cash equivalents at beginning of period

    114,627       199,272  

Cash and cash equivalents at end of period

  $ 199,348     $ 113,245  
                 

Cash paid for interest

  $ -     $ -  

Cash paid for income taxes

  $ 1,506     $ 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 first three months of the nine month period ended September 30, 2018.

 

4

 

 

 Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

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

 

 

 

3 )

INVENTORY

 

The carrying values of inventory were as follows as of:  

 

   

September 30, 2018

   

December 31, 2017

 

At average cost (approximates current cost)

               

Finished goods

  $ 18,668     $ 22,998  

Work in process

    1,858       1,735  

Raw materials and supplies

    38,221       27,143  
      58,747       51,876  

LIFO reserve

    (10,742 )     (8,122 )

Total inventory

  $ 48,005     $ 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 nine months ended September 30, 2018.  For the three months ended September 30, 2017, there was no LCM adjustment. In the nine months ended September 30, 2017, there was an LCM adjustment of $1,912 which impacted inventory sold prior to September 30, 2017.

 

 

 

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 $676 and $3,314 for the three months ended September 30, 2018 and 2017, respectively, and a loss of $3,947 and $1,511 for the nine months ended September 30, 2018 and 2017, respectively.

 

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

 

   

September 30, 2018

   

December 31, 2017

 
   

Contract quantity

Short

   

Fair Value

   

Contract quantity

Short

   

Fair Value

 

Regulated options, included in other current assets

    -     $ -       200     $ (2,428 )

Regulated fixed price future commitments, included in other current assets

    31     $ (138 )     -     $ -  

 

 

The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $276 and $2,660 at September 30, 2018 and December 31, 2017, 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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

  

 

 

5 )

MARKETABLE SECURITIES 

 

At September 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 three and nine months ended, September 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 September 30, 2018 and December 31, 2017: 

 

   

September 30, 2018

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Exchange traded debt

  $ 1,428     $ 83     $ (11 )   $ 1,500  

Trust preferred

    3,147       86       (1 )     3,232  

Total debt securities

  $ 4,575     $ 169     $ (12 )   $ 4,732  

 

   

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 $578 at September 30, 2018, and the aggregate fair value of debt and equity securities with unrealized losses totaled $14,103 at December 31, 2017. As of September 30, 2018, FutureFuel had investments in debt securities with a total value of $103 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 $4 and $124, respectively, at September 30, 2018 and December 31, 2017.  Those loss positions represented a minimal reduction for the securities and are expected to fully recover given changes in market value.

 

 

 

6 )

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

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

 

   

September 30, 2018

   

December 31, 2017

 

Accrued employee liabilities

  $ 5,859     $ 976  

Accrued property, franchise, motor fuel and other taxes

    1,516       1,387  

Other

    478       105  

Total

  $ 7,853     $ 2,468  

 

6

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

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

    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 September 30, 2018.

 

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

 

 

 

8 )

PROVISION FOR INCOME TAXES 

 

The following table summarizes the provision for income taxes.

   

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Provision for income taxes

  $ 4,012     $ 1,730     $ 2,336     $ 3,375  

Effective tax rate

    29.8 %     34.2 %     4.4 %     30.9 %

 

 

The effective tax rate for the three months ended September 30, 2018 and 2017 reflects our expected tax rate on reported operating income before income tax. This three-month effective rate is expected to materially continue for the remainder of 2018 absent the effect of the subsequent event impact as noted below.

 

The effective tax rate for the nine months ended September 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 nine months ended September 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 nine months ended September 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 September 30, 2018 and December 31, 2017.

 

FutureFuel records interest and penalties, net, as a component of provision for income taxes. Interest and penalties included as a component of provision for income taxes amounted to $81 for the three and nine months ended September 30, 2018, and $29 and $402, for the three and nine months ended September 30, 2017, respectively.

 

In a decision dated November 1, 2018, the United States Court of Appeals for the Federal Circuit affirmed a November 22, 2016 decision of the Federal Court of Claims pertaining to the income tax treatment of the blenders’ fuel mixture credit.  Like the Federal Court of Claims before it, the Court of Appeals found that the mixture credit is a reduction in excise tax liability and, to the extent the mixture credit reduces excise tax liabilities, the mixture credit is a component of taxable income.

 

As a result of the November 1, 2018 decision, FutureFuel is assessing whether the recorded benefits associated with the mixture credit should be re-measured in the period of the decision.  If FutureFuel determines that ASC 740, Income Tax’s recognition threshold of more-likely-than-not is no longer met because of the decision, FutureFuel may recognize additional income tax expense ranging from approximately $4,000 to $4,500 in the fourth quarter.      

 

  

 

9 )

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 September 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 and nine-month periods ended September 30, 2018 or 2017 as the vesting conditions had not been satisfied.

 

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

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Numerator:

                               

Net income

  $ 9,445     $ 3,334     $ 51,322     $ 7,564  

Less: distributed earnings allocated to non-vested stock

    -       -       -       -  

Less: undistributed earnings allocated to non-vested restricted stock

    (4 )     (3 )     (26 )     (15 )

Numerator for basic earnings per share

  $ 9,441     $ 3,331     $ 51,296     $ 7,549  

Effect of dilutive securities:

                               

Add: undistributed earnings allocated to non-vested restricted stock

    4       3       26       15  

Less: undistributed earnings reallocated to non-vested restricted stock

    (4 )     (3 )     (26 )     (15 )

Numerator for diluted earnings per share

  $ 9,441     $ 3,331     $ 51,296     $ 7,549  

Denominator:

                               

Weighted average shares outstanding – basic

    43,724,195       43,705,234       43,719,215       43,662,672  

Effect of dilutive securities:

                               

Stock options and other awards

    8,725       9,519       6,155       8,748  

Weighted average shares outstanding – diluted

    43,732,920       43,714,753       43,725,370       43,671,420  
                                 

Basic earnings per share

  $ 0.22     $ 0.08     $ 1.17     $ 0.17  

Diluted earnings per share

  $ 0.22     $ 0.08     $ 1.17     $ 0.17  

 

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 nine months ended September 30, 2018 and 2017 because they were anti-dilutive in the periods. The weighted average number of options excluded on this basis was 0 and 20,000 for the three-months and nine-months ended September 30, 2018, respectively.  The weighted average number of options excluded on this basis was 0 and 10,000 for the three-months and nine-months ended September 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 September 30,

   

Nine months ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

United States

  $ 81,152     $ 76,711     $ 223,943     $ 197,044  

All Foreign Countries

    270       895       1,562       2,721  

Total

  $ 81,422     $ 77,606     $ 225,505     $ 199,765  

 

 

Revenues from a single foreign country during the three and nine months ended September 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 September 30,

   

Nine months ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Revenue

                               

Custom chemicals

  $ 23,973     $ 23,593     $ 74,465     $ 65,189  

Performance chemicals

    4,049       4,574       14,165       12,686  

Chemicals revenue

    28,022       28,167       88,630       77,875  

Biofuels revenue

    53,400       49,439       136,875       121,890  

Total Revenue

  $ 81,422     $ 77,606     $ 225,505     $ 199,765  
                                 

Segment gross profit/(loss)

                               

Chemicals

  $ 8,898     $ 8,060     $ 24,470     $ 20,401  

Biofuels

    3,755       (2,534 )     33,961       (6,947 )

Total gross profit

    12,653       5,526       58,431       13,454  

Corporate expenses

    (2,424 )     (2,326 )     (7,795 )     (7,405 )

Income before interest and taxes

    10,229       3,200       50,636       6,049  

Interest and other income

    3,358       1,965       6,688       5,679  

Interest and other expense

    (130 )     (101 )     (3,666 )     (789 )

Provision for income taxes

    (4,012 )     (1,730 )     (2,336 )     (3,375 )

Net income

  $ 9,445     $ 3,334     $ 51,322     $ 7,564  

 

 

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 September 30, 2018 and December 31, 2017.

 

   

Asset (Liability)

 
           

Fair Value Measurements Using

 
   

Fair Value at

   

Inputs Considered as:

 

Description

 

September 30, 2018

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ (138 )   $ (138 )   $ -     $ -  

Preferred stock, and other equity instruments

  $ 98,370     $ 98,370     $ -     $ -  

Trust preferred and exchange traded debt instruments

  $ 4,732     $ 4,732     $ -     $ -  

 

   

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 nine months ended September 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 September 30, 2018 and 2017

(net of tax)

   

2018

   

2017

 

Balance at July 1

  $ 145     $ 7,499  

Other comprehensive income before reclassifications

    (21 )     670  

Amounts reclassified from accumulated other comprehensive income

    -       (17 )

Net current-period other comprehensive income

    (21 )     653  

Balance at September 30

  $ 124     $ 8,152  

 

 

Changes in Accumulated Other Comprehensive Income From Unrealized

Gains and Losses on Available-for-Sale Securities

For the nine months ended September 30, 2018 and 2017

(net of tax)

   

2018

   

2017

 

Balance at January 1[1]

  $ 160     $ 3,540  

Other comprehensive income before reclassifications

    (36 )     4,259  

Amounts reclassified from accumulated other comprehensive income

    -       353  

Net current-period other comprehensive income

    (36 )     4,612  

Balance at September 30

  $ 124     $ 8,152  

 

[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 nine months ended September 30, 2018 and 2017: 

 

Reclassifications from Accumulated Other

Comprehensive Income for the three and nine months ended

September 30, 2018 and 2017

   

Three months ended

September 30,

   
   

2018

   

2017

 

Affected Line Item in Statement of Operations

Unrealized gains on available-for-sale debt securities

  $ -     $ 26  

Gain/(loss) on marketable securities

Total before tax

    -       26    

Tax provision

    -       (9 )  

Total reclassifications

  $ -     $ 17    

 

   

Nine months ended

September 30,

   
   

2018

   

2017

 

Affected Line Item in Statement of Operations

Unrealized losses on available-for-sale debt securities

  $ -     $ (543 )

Gain/(loss) on marketable securities

Total before tax

    -       (543 )  

Tax benefit

    -       190    

Total reclassifications

  $ -     $ (353 )  

 

*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 September 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. In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements

 

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. The targeted improvements provide entities with an additional (and optional) transition method to adopt the new leases standard.

 

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 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 and related subsequently issued ASU’s (“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 nine months ended September 30, 2018. There were no contract assets recognized under Topic 605:

 

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

 

   

Three months ended

September 30, 2018

 

Beginning balance at June 30, 2018

  $ 1,110  

Additions

    656  

Reductions

    (1,110 )

Ending balance at September 30, 2018

  $ 656  

 

   

Nine months ended

September 30, 2018

 

Beginning balance at January 1, 2018

  $ 505  

Additions

    2,417  

Reductions

    (2,266 )

Ending balance at September 30, 2018

  $ 656  

 

 

   

As Reported

   

Under Prior Standard

   

Contract Liabilities

 

Topic 606

   

Topic 605

   

Change

 

Beginning balance at July 1, 2018

  $ 18,155     $ 13,098     $ 5,057  

Additions

    474       310       164  

Revenue recognized for the three months ended September 30, 2018

    (1,486 )     (965 )     (521 )

Ending balance at September 30, 2018

  $ 17,143     $ 12,443     $ 4,700  
                         

Beginning balance at January 1, 2018

  $ 21,013     $ 14,469     $ 6,544  

Additions

    932       768       164  

Revenue recognized for the nine months ended September 30, 2018

    (4,802 )     (2,794 )     (2,008 )

Ending balance at September 30, 2018

  $ 17,143     $ 12,443     $ 4,700  

 

 

Transaction price allocated to the remaining performance obligations

 

As of September 30, 2018, approximately $17,143 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 40% of this revenue is expected to be recognized over the next 12 months, and 60% 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

September 30,

   

Nine months ended

September 30,

 
   

2018

   

2017(a)

   

2018

   

2017 (a)

 

Contract revenue from customers with > 1 year arrangements

  $ 14,587     $ 14,779     $ 47,745     $ 40,706  

Contract revenue from customers with < 1 year arrangement

    66,780       62,772       191,194       158,894  

Revenue from non-contractual arrangements

    55       55       165       165  

BTC rebate

    -       -       (13,599 )     -  

Total revenue

  $ 81,422     $ 77,606     $ 225,505     $ 199,765  

 

Timing of revenue

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2018

   

2017(a)

   

2018

   

2017(a)

 

Bill and hold revenue

  $ 11,576     $ 4,519     $ 32,470     $ 12,477  

Non-bill and hold revenue

    69,846       73,087       193,035       187,288  

Total revenue

  $ 81,422     $ 77,606     $ 225,505     $ 199,765  

 

 

(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 nine months ended September 30, 2018.

 

 

   

Three months ended September 30, 2018

 
   

Balances Prior to

Adoption of Topic 606

   

Adjustments

   

As Reported

 
                         

Revenue

  $ 80,521     $ 67     $ 80,588  

Cost of goods sold

    61,879       (320 )     61,559  

Gross profit

    12,266       387       12,653  

Income from operations

    9,842       387       10,229  

Income before income taxes

    13,070       387       13,457  

Provision for income taxes

    3,915       97       4,012  

Net income

  $ 9,155     $ 290     $ 9,445  

Basic earnings per share

  $ 0.21     $ 0.01     $ 0.22  

Diluted earnings per share

  $ 0.21     $ 0.01     $ 0.22  

Comprehensive income

  $ 9,134     $ 290     $ 9,424  

 

16

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

   

Nine months ended September 30, 2018

 
   

Balances Prior to

Adoption of

Topic 606

   

Adjustments

   

As Reported

 
                         

Revenue

  $ 220,520     $ 2,664     $ 223,184  

Cost of goods sold

    146,823       93       146,916  

Gross profit

    55,860       2,571       58,431  

Income from operations

    48,065       2,571       50,636  

Income before income taxes

    51,087       2,571       53,658  

Provision for income taxes

    1,750       586       2,336  

Net income

  $ 49,337     $ 1,985     $ 51,322  

Basic earnings per share

  $ 1.13     $ 0.04     $ 1.17  

Diluted earnings per share

  $ 1.13     $ 0.04     $ 1.17  

Comprehensive income

  $ 49,301     $ 1,985     $ 51,286  

 

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 September 30, 2018.

 

   

 

Balances Prior to

Adoption of

Topic 606

   

Adjustments

   

As Reported

 

Accounts receivable

  $ 18,286     $ 656     $ 18,942  

Inventory

    48,453       (448 )     48,005  

Income tax receivable

    519       (40 )     479  

Total current assets

    373,558       168       373,726  

Total assets

    483,037       168       483,205  

Accounts payable

    31,578       (164 )     31,414  

Deferred revenue - short term

    2,690       4,424       7,114  

Total current liabilities

    47,879       4,260       52,139  

Deferred revenue - long term

    14,375       276       14,651  

Noncurrent deferred income tax liability

    18,605       (1,175 )     17,430  

Total noncurrent liabilities

    34,117       (899 )     33,218  

Total liabilities

    81,996       3,361       85,357  

Retained earnings

    118,804       (3,193 )     115,611  

Total stockholders' equity

    401,041       (3,193 )     397,848  

Total liabilities and stockholders' equity

  $ 483,037     $ 168     $ 483,205  

 

 

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

 

   

Balances Prior to

                 
   

Adoption of

           

As Reported

 
   

Topic 606

   

Adjustments

   

or Restated

 

Change in net income

  $ 49,337     $ 1,985     $ 51,322  

Benefit for deferred income taxes

    (2,434 )     (1,175 )     (3,609 )

Changes in operating assets and liabilities:

                       

Accounts receivables

    3,687       (656 )     3,031  

Inventory

    (4,699 )     448       (4,251 )

Income tax receivable

    6,418       40       6,458  

Accounts payable

    13,182       (164 )     13,018  

Deferred revenue

    (2,194 )     (478 )     (2,672 )

Net cash provided by operating activities

  $ 79,169     $ -     $ 79,169  

 

17

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

18 )

CHANGE IN ACCOUNTING PRINCIPLE

 

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 September 30,

   

Nine months ended September 30,

 
   

2018

      2017*       2018       2017*  

Net gains/(losses) recognized on equity securities

  $ 815     $ 26     $ (3,273 )   $ (543 )

Less: net gains/(losses) recognized during the period on equity securities sold during the period

    -       26       2,324       (543 )

Unrealized gains/(losses) during the reporting period on equity securities held at the reporting date

  $ 815     $ -     $ (5,597 )   $ -  

 

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

 

18

 

 

 

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 September 30,

 
                   

Dollar

   

%

 
   

2018

   

2017

   

Change

   

Change

 

Revenues

  $ 81,422     $ 77,606     $ 3,816       4.9 %

Income from operations

  $ 10,229     $ 3,200     $ 7,029       219.7 %

Net income

  $ 9,445     $ 3,334     $ 6,111       183.3 %

Earnings per common share:

                               

Basic

  $ 0.22     $ 0.08     $ 0.14       175.0 %

Diluted

  $ 0.22     $ 0.08     $ 0.14       175.0 %

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

  $ 642     $ 856     $ (214 )     (25.0% )

Adjusted EBITDA

  $ 13,661     $ 9,553     $ 4,108       43.0 %

 

   

Nine months ended September 30,

 
                   

Dollar

   

%

 
   

2018

   

2017

   

Change

   

Change

 

Revenues

  $ 225,505     $ 199,765     $ 25,740       12.9 %

Income from operations

  $ 50,636     $ 6,049     $ 44,587       737.1 %

Net income

  $ 51,322     $ 7,564     $ 43,758       578.5 %

Earnings per common share:

                               

Basic

  $ 1.17     $ 0.17     $ 1.00       588.2 %

Diluted

  $ 1.17     $ 0.17     $ 1.00       588.2 %

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

  $ 1,539     $ 2,413     $ (874 )     (36.2% )

Adjusted EBITDA

  $ 62,926     $ 17,201     $ 45,725       265.8 %

 

19

 

 

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 September 30,

   

Nine months ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Adjusted EBITDA

  $ 13,661     $ 9,553     $ 62,926     $ 17,201  

Depreciation

    (2,732 )     (2,927 )     (8,244 )     (8,735 )

Non-cash stock-based compensation

    (107 )     (128 )     (321 )     (878 )

Interest and dividend income

    2,543       1,965       6,688       5,679  

Non-cash interest expense (including amortization of deferred financing costs)

    (43 )     (43 )     (130 )     (129 )

Losses on disposal of property and equipment

    (4 )     (68 )     (41 )     (145 )

Losses on derivative instruments

    (676 )     (3,314 )     (3,947 )     (1,511 )

Gains/(losses) on marketable securities

    815       26       (3,273 )     (543 )

Provision for income taxes

    (4,012 )     (1,730 )     (2,336 )     (3,375 )

Net income

  $ 9,445     $ 3,334     $ 51,322     $ 7,564  

 

20

 

 

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

 

   

Nine months ended September 30,

 
   

2018

   

2017

 

Adjusted EBITDA

  $ 62,926     $ 17,201  

Benefit for deferred income taxes

    (3,609 )     (1,303 )

Impairment of fixed assets

    258       28  

Interest and dividend income

    6,688       5,679  

Provision for income taxes

    (2,336 )     (3,375 )

Losses on derivative instruments

    (3,947 )     (1,511 )

Change in fair value of derivative instruments

    (2,290 )     (60 )

Changes in operating assets and liabilities, net

    21,479       19,781  

Net cash provided by operating activities

  $ 79,169     $ 36,440  

 

21

 

 

Results of Operations 

 

Consolidated

 

   

Three months ended September 30,

           

Nine months ended September 30,

 
                   

Change

                   

Change

 
   

2018

   

2017

   

Amount

   

%

   

2018

   

2017

   

Amount

   

%

 
                                                                 

Revenues

  $ 81,422     $ 77,606     $ 3,816       4.9 %   $ 225,505     $ 199,765     $ 25,740       12.9 %

Volume/product mix effect

                  $ (3,054 )     (3.9 %)                   $ 18,288       9.2 %

Price effect

                  $ 6,870       8.9 %                   $ 7,452       3.7 %
                                                                 

Gross profit

  $ 12,653     $ 5,526     $ 7,127       129.0 %   $ 58,431     $ 13,454     $ 44,977       334.3 %

 

 

Consolidated sales revenue in the three and nine months ended September 30, 2018 increased 4.9% or $3,816 and 12.9% or $25,740, compared to the three and nine months ended September 30, 2017. The current three-month period was benefited $6,086 from higher biofuel prices and unfavorably affected by a volume reduction in pipeline trades. In the first nine months of 2018, sales revenue benefited from strong demand in the agricultural chemical and energy markets with higher sales volumes and prices in both segments. Within the chemical segment, in the current nine-month period, sales volume/product mix improved 11.0% or $8,543 in addition to an increase of $2,212 from higher average selling prices. The price increases were primarily from higher prices indexed to higher raw material prices. Within the biofuel segment, sales revenue increased $9,745 in the current nine-month period from improved sales volumes and product mix and $5,240 from higher average selling prices experienced in the fuel industry. Negatively influencing this price effect was the retroactive reinstatement of the 2017 blenders’ tax credit (BTC) passed into law on February 9, 2018. Please see Note 2 for additional discussion.

  

Gross profit in the three and nine months ended September 30, 2018 increased $7,127 and $44,977 compared to the three months and nine months ended September 30, 2017. The three-month increase was primarily from stronger margins in the biofuel segment. The nine-month increase was primarily from improved margins in the biofuel segment from the BTC which expired on December 31, 2016 and was retroactively reinstated for 2017 (but, not beyond 2017) on February 9, 2018 resulting in the benefit being recognized in 2018. Also benefiting gross profit in the nine-month period was increased sales volumes in both the chemicals and biofuels segments. 

 

Gross profit was favorably impacted in the three and nine months ended September 30, 2018, as compared to the prior year period, by the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting.  The change in this adjustment decreased gross profit $443 in the three months ended September 30, 2018 and increased gross profit $2,708 in the nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017. Please see Note 3 for additional discussion.

 

Gross profit was favorably impacted by the change in the unrealized and realized activity in derivative instruments with a loss of $676 in the three months ended September 30, 2018, as compared to a loss of $3,314 in the prior year period. In the nine-month period, gross profit was impacted negatively by the change in unrealized and realized activity in derivative instruments with a loss of $3,947, as compared to a loss of $1,511, in the prior year period.

 

 

Operating Expenses

 

Operating expenses increased $98 and $390 in the three and nine months ended September 30, 2018, respectively, as compared to the three and nine months ended September 30, 2017. This increase was primarily from an increase in purchased services and compensation.

 

 

Provision for Income Taxes 

 

The effective tax rate for the three months ended September 30, 2018 and 2017 reflects our expected tax rate on reported operating income before income tax. This three-month effective rate is expected to materially continue for the remainder of 2018 absent the effect of the subsequent event impact as noted below.

 

22

 

 

The effective tax rate for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2018.

 

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

 

FutureFuel records interest and penalties, net, as a component of provision for income taxes. Interest and penalties included as a component of provision for income taxes amounted to $81 for the three and nine months ended September 30, 2018, and $29 and $402, for the three and nine months ended September 30 2017, respectively.

 

In a decision dated November 1, 2018, the United States Court of Appeals for the Federal Circuit affirmed a November 22, 2016 decision of the Federal Court of Claims pertaining to the income tax treatment of the blenders’ fuel mixture credit.  Like the Federal Court of Claims before it, the Court of Appeals found that the mixture credit is a reduction in excise tax liability and, to the extent the mixture credit reduces excise tax liabilities, the mixture credit is a component of taxable income.

 

As a result of the November 1, 2018 decision, FutureFuel is assessing whether the recorded benefits associated with the mixture credit should be re-measured in the period of the decision.  If FutureFuel determines that ASC 740, Income Tax’s recognition threshold of more-likely-than-not is no longer met because of the decision, FutureFuel may recognize additional income tax expense ranging from approximately $4,000 to $4,500 in the fourth quarter.

 

  

Net Income

 

Net income for the three and nine months ended September 30, 2018 increased $6,111 and $43,758 as compared to the same periods in 2017. The increase was from stronger sales volumes, a 14% reduction in the federal statutory tax rate, and biodiesel tax credits and incentives that were reinstated in the three months ended March 31, 2018 that were not in effect for 2017 (see Note 2).

 

 

Chemicals Segment

   

Three months ended September 30,

   

Nine months ended September 30,

 
                   

Change

                   

Change

 
   

2018

   

2017

   

Amount

   

%

   

2018

   

2017

   

Amount

   

%

 
                                                                 

Revenues

  $ 28,022     $ 28,167     $ (145 )     (0.5% )   $ 88,630     $ 77,875     $ 10,755       13.8 %

Volume/product mix effect

                  $ (929 )     (3.3% )                   $ 8,543       11.0 %

Price effect

                  $ 784       2.8 %                   $ 2,212       2.8 %
                                                                 

Gross profit

  $ 8,898     $ 8,060     $ 838       10.4 %   $ 24,470     $ 20,401     $ 4,069       19.9 %

 

 

Sales revenue in the three and nine months ended September 30, 2018 decreased $145 and increased $10,755, compared to the three and nine months ended September 30, 2017. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months and nine months ended September 30, 2018 totaled $23,973 and $74,465, an increase of $380 and $9,276 from the comparable periods, respectively in 2017. In the three-month comparison period, revenue was unfavorably impacted by lower volumes from the timing of custom chemicals shipments. In the nine-month comparison period, sales revenue was benefited from higher volumes in the agrochemical and energy markets. To a lesser extent, the three and nine-month comparison periods were benefited from the change in the recognition of contract liabilities in deferred revenue for a few custom chemical contracts from the adoption of ASC 606.  See Note 17 for additional discussion.  Performance chemicals (comprised of multi-customer products, which are sold based on specification) sales revenues were $4,049 and $14,165, in the three and nine months ended September 30, 2018, a decrease of $525 and an increase of $1,479 from the three and nine months ended September 30, 2017, respectively. The change in the three-month period was related to timing of shipments for products campaigned.  The nine-month comparison period was benefited by higher unit pricing for glycerin products based on improved market conditions.

 

Gross profit for the chemicals segment for the three and nine months ended September 30, 2018, increased $838 and $4,069 when compared to the three and nine months ended September 30, 2017, respectively. This increase was driven primarily by higher volumes in the agrochemical and energy markets, and to a lesser extent, from a favorable product mix and the change in the recognition of contract liabilities in deferred revenue for a few customer chemical contracts given the adoption of ASC 606. See Note 17 for additional discussion.

 

23

 

 

Biofuels Segment

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
                   

Change