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, 2015 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

 

FUTUREFUEL CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		20-3340900
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

8235 Forsyth Blvd., Suite 400

St. Louis, Missouri  63105

(Address of Principal Executive Offices)

 

(314) 854-8385

(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  ☐ (do not check if a smaller reporting company)	Smaller reporting  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 November 9, 2015: 43,712,388

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The following sets forth our unaudited consolidated balance sheet as at September 30, 2015, our audited consolidated balance sheet as at December 31, 2014, our unaudited consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2015 and September 30, 2014, and our unaudited consolidated statements of cash flows for the nine-month periods ended September 30, 2015 and September 30, 2014.

 

FutureFuel Corp.

Consolidated Balance Sheets

As of September 30, 2015 and December 31, 2014

(Dollars in thousands)

 

               

 

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

 

 

FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

For the Three Months Ended September 30, 2015 and 2014

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

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

 

 

FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

For the Nine Months Ended September 30, 2015 and 2014

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

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

 

 

FutureFuel Corp.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2015 and 2014

(Dollars in thousands)

(Unaudited)

 

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

All dollar amounts expressed as numbers in this MD&A (except per share amounts) are in thousands.

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, 2015				Three months ended September 30, 2014				Dollar Change				% Change
Revenues		$	107,054			$	103,135			$	3,919				3.8	%
Income from operations		$	5,933			$	18,175			$	(12,242	)			(67.4	%)
Net income		$	4,850			$	11,451			$	(6,601	)			(57.6	%)
Earnings per common share:
Basic		$	0.11			$	0.26			$	(0.15	)			(57.7	%)
Diluted		$	0.11			$	0.26			$	(0.15	)			(57.7	%)
Capital expenditures and intangibles (net of customer reimbursements and regulatory grants)		$	996			$	671			$	325				48.4	%
Adjusted EBITDA		$	2,592			$	15,902			$	(13,310	)			(83.7	%)

 

 

		Nine months ended September 30, 2015				Nine months ended September 30, 2014				Dollar Change				% Change
Revenues		$	265,739			$	253,371			$	12,368				4.9	%
Income from operations		$	19,887			$	29,797			$	(9,910	)			(33.3	%)
Net income		$	16,774			$	23,072			$	(6,298	)			(27.3	%)
Earnings per common share:
Basic		$	0.38			$	0.53			$	(0.15	)			(28.3	%)
Diluted		$	0.38			$	0.53			$	(0.15	)			(28.3	%)
Capital expenditures and intangibles (net of customer reimbursements and regulatory grants)		$	5,967			$	5,790			$	177				3.1	%
Adjusted EBITDA		$	24,745			$	32,719			$	(7,975	)			(24.4	%)

 

 

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:
		2015				2014				2015				2014
Adjusted EBITDA		$	2,592			$	15,902			$	24,745			$	32,719
Depreciation and amortization			(2,640	)			(2,195	)			(7,548	)			(6,722	)
Non-cash stock-based compensation			(477	)			(776	)			(1,431	)			(980	)
Interest and dividend income			1,336				1,432				4,008				5,369
Interest expense			(42	)			(6	)			(91	)			(19	)
Losses on disposal of property and equipment			(46	)			(11	)			(168	)			(15	)
Gains on derivative instruments			6,456				5,239				4,119				4,945
(Losses)/gains on marketable securities			(269	)			-				1,202				2,900
Income tax expense			(2,060	)			(8,134	)			(8,062	)			(15,125	)
Net income		$	4,850			$	11,451			$	16,774			$	23,072

 

 

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

 

		Nine months ended September 30:
		2015				2014
Adjusted EBITDA		$	24,745			$	32,719
Amortization of deferred financing costs			(72	)			-
(Provision)/benefit from deferred income taxes			(6,569	)			2,132
Impairment of fixed assets			-				247
Interest and dividend income			4,008				5,369
Income tax expense			(8,062	)			(15,125	)
Gains on derivative instruments			4,119				4,945
Change in fair value of derivative instruments			1,755				1,923
Changes in operating assets and liabilities, net			39,997				(5,724	)
Other			1				-
Net cash provided by operating activities		$	59,922			$	26,486

 

 

Results of Operations 

 

		Three months ended September 30:																Nine months ended September 30:
										Change																Change
		2015				2014				$				%				2015				2014				$				%
Sales		$	107,054			$	103,135			$	3,919				3.8	%		$	265,739			$	253,371			$	12,368				4.9	%
Volume/product mix effect											23,595				22.9	%											62,884				24.8	%
Price effect											(19,676	)			(19.1	%)											(50,516	)			(19.9	%)
Gross profit		$	8,675			$	20,872			$	(12,197	)			(58.4	%)		$	27,533			$	37,052			$	(9,519	)			(25.7	%)

 

Consolidated sales revenue in the three and nine months ended September 30, 2015 increased $3,919 and $12,368, compared to the three and nine months ended September 30, 2014, respectively. This increase was primarily from increased sales volume in the biofuels segment offset by lower biofuels sales prices and lower chemicals segment sales. The reduction to the chemicals segment revenue was primarily attributed to the graphite powder contract termination payment of $8,816, which was recorded in revenue in the third quarter of 2014 and did not recur in 2015.

 

Gross profit in the three and nine months ended September 30, 2015 decreased to $8,675 and $27,533 compared to $20,872 and $37,052 for the three and nine months ended September 30, 2014, respectively. These decreases resulted from: i) the before mentioned contract termination payment of $8,816, which benefited the third quarter of 2014 and did not recur in 2015; ii) reduced chemicals sales volumes of the bleach activator laundry additive partially offset by improved margins in other custom chemicals; iii) reduced profitability on biodiesel as feedstock prices decreased at a slower rate than the selling price; and iv) reduced profitability on common carrier pipeline activity consistent with the global decline in the fuel market. Furthermore, our gross profit was impacted by adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. Please see footnote 2 to our consolidated financial statements for the three and nine months ended September 30, 2015 for a detailed discussion of the impact of these adjustments on gross profit.

  

Chemicals Segment

 

		Three months ended September 30:																Nine months ended September 30:
										Change																Change
		2015				2014				$				%				2015				2014				$				%
Sales		$	31,607			$	44,939			$	(13,332	)			(29.7%	)		$	98,501			$	107,824			$	(9,323	)			(8.6%	)
Volume/product mix effect											(13,035	)			(29.0%	)											(8,875	)			(8.2%	)
Price effect											(297	)			(0.7%	)											(448	)			(0.4%	)
Gross profit		$	7,294			$	17,824			$	(10,530	)			(59.1%	)		$	28,159			$	33,989			$	(5,830	)			(17.2%	)

 

Sales revenue in the three months ended September 30, 2015 declined by $13,332 compared to the three months ended September 30, 2014. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months ended September 30, 2015 totaled $26,665, a decline of $13,968 from the comparable period in 2014. This decline was primarily attributed to the graphite powder contract termination payment of $8,816, which was recorded in revenue in the third quarter of 2014 and did not recur in the third quarter of 2015. The decline in sales revenue was further due to continued reductions in the sales of the bleach activator laundry additive sold to Procter & Gamble ("P&G"). Our agreement with P&G for sales of the bleach activator laundry additive (entered into by our subsidiary, FutureFuel Chemical Company) was set to expire on December 31, 2015. On September 30, 2015, FutureFuel Chemical Company signed a contract amendment to extend the supply of the bleach activator laundry detergent additive through 2018. The amendment provides for sales of the product to P&G in reduced volumes with adjusted pricing during 2015-2018 to account for revised market conditions. We do not anticipate that sales of the bleach activator laundry detergent additive to P&G will account for 10% or more of our consolidated revenues going forward. Also, we acquired certain intellectual property rights related to the bleach activator product, which we anticipate will support sales of this product to other customers. To the extent such sales are realized, we anticipate reporting such sales as a component of our performance chemicals segment. Performance chemicals (comprised of multi-customer products which are sold based on specification) sales revenues were $4,942 in the three months ended September 30, 2015, an increase of $636 from the three months ended September 30, 2014. This increase was due to improved sales of glycerin products, which offset declines in sales of polymer modifier products.

 

Sales revenue in the nine months ended September 30, 2015 declined compared to the revenue in the nine months ended September 30, 2014 by $9,323. Sales revenue for our custom chemicals declined $9,585. This decline was primarily attributed to the graphite powder contract termination payment of $8,816, which was recorded in revenue in 2014 and did not recur in 2015. Additionally, sales revenue declines were experienced due to continued declines in our bleach activator laundry additive business. Increased sales revenue from herbicide intermediates, antimicrobial intermediates and fuel additive products helped offset these declines by $12,916. Performance chemicals sales revenues increased 2% to $13,880 for the nine months ended September 30, 2015 due to improved sales of glycerin products, which were offset by declines in sales of polymer modifier products.

 

 

Gross profit for the Chemicals segment for the three months ended September 30, 2015 decreased by $10,530 when compared to the three months ended September 30, 2014. This decrease was primarily from the above mentioned termination payment of $8,816, which was recorded in revenue in the third quarter of 2014 and did not recur in 2015. Furthermore, gross profit in the Chemicals segment for the three months ended September 30, 2015 was impacted by adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. Please see footnote 2 to our consolidated financial statements for the three months ended September 30, 2015 for a detailed discussion of the impact on gross profit.

 

Gross profit for the Chemicals segment for the nine months ended September 30, 2015 decreased by $5,830 when compared to the nine months ended September 30, 2014. This decrease was primarily from the above mentioned termination payment of $8,816, which was recorded in revenue in the third quarter of 2014 and did not recur in 2015, as well as declines in the bleach activator laundry detergent additive. This decrease was offset by net gross profit improvements in Custom chemicals due to growth in herbicide intermediate, antimicrobial intermediates and fuel additive products.

  

Biofuels Segment 

 

		Three months ended September 30:																Nine months ended September 30:
										Change																Change
		2015				2014				$				%				2015				2014				$				%
Sales		$	75,447			$	58,196			$	17,251				29.6	%		$	167,238			$	145,547			$	21,691				14.9	%
Volume/product mix effect											36,630				62.9	%											71,759				49.3	%
Price effect											(19,379	)			(33.3	%)											(50,068	)			(34.4	%)
Gross profit		$	1,381			$	3,048			$	(1,667	)			(54.7	%)		$	(626	)		$	3,063			$	(3,689	)			(120.4	%)

 

Sales revenue in the three months ended September 30, 2015 increased $17,251 when compared to the three months ended September 30, 2014. This increase was primarily from increased sales volume on common carrier pipelines. Such sales on common carrier pipelines totaled $27,689 and $11,104 in the three months ended September 30, 2015 and 2014, respectively. We also experienced a slight increase in sales revenue of biodiesel and diesel blends in the third quarter of 2015 as compared to the third quarter of 2014.

 

Sales revenue in the nine months ended September 30, 2015 increased to $167,238 from $145,547 in the nine months ended September 30, 2014. The increase was primarily from increased sales volume on common carrier pipelines with a net increase of $46,650. The increase in sales volumes of biodiesel and diesel blends were more than offset by the reduction in selling price which resulted in a net decrease in sales revenue of $24,959 in the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. This decline was driven by the continued weakened renewable energy market, which tracked a global decline in fuel prices.

 

Revenues from common carrier pipelines varies as its revenue recognition depends upon whether a transaction is bought from and sold to the same party. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another (including buy/sell agreements) are combined and recorded on a net basis. Additionally, revenue from common carrier pipelines fluctuates with market conditions.

  

A portion of our biodiesel sold in 2015 and 2014 was to a major refiner in the United States and no assurances can be given that we will continue to sell to such major refiner, or, if we do sell, the volume we will sell or the profit margin we will realize. We do not believe that the loss of this customer would have a material adverse effect on our biofuels segment or on us as a whole in that: (i) unlike our custom manufacturing products, biodiesel is a commodity with a large potential customer base; (ii) we believe that we could readily sell our biodiesel to other customers as potential demand from other customers for biodiesel exceeds our production capacity; (iii) our sales to this customer are not under fixed terms and the customer has no fixed obligation to purchase any minimum quantities except as stipulated by short term purchase orders; and (iv) the prices we receive from this customer are based upon then-market rates, as would be the case with sales of this commodity to other customers.

 

  

Biofuels gross profit in the three months ended September 30, 2015 decreased $1,667 when compared to the three months ended September 30, 2014. Profits decreased primarily from: i) reduced profitability experienced on common carrier pipelines ii) feedstock prices declining at a slower pace than biodiesel selling prices; iii) RIN prices declining; iv) nationwide energy prices decreasing; and v) increased production levels in the industry as a whole in anticipation of a retroactive reinstatement of the $1.00 biodiesel blenders’ tax credit (BTC). Also influencing the decline in the third quarter 2015 profit in comparison to the third quarter of 2014 were adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. Please see footnote 2 to our consolidated financial statements for the three months ended September 30, 2015 for a detailed discussion of the impact of these adjustments on gross profit.

 

Biofuels gross profit in the nine months ended September 30, 2015 decreased $3,689 compared to the nine months ended September 30, 2014. This decline was primarily from the same four items detailed in the proceding paragraph. Benefiting biofuels gross profit in the nine month period of 2015 as compared to the same period in 2014 were adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. Please see footnote 2 to our consolidated financial statements for the nine months ended September 30, 2015 for a detailed discussion.

 

Additionally, gross profit benefited from gains on derivative instruments of $6,456 and $5,239 for the three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, gross profit gains on derivatives were $4,119 and $4,945, respectively. In order to better manage the commodity price risk caused by market fluctuations in biofuel prices, we may enter into exchange traded commodity futures and options contracts. We account for these derivative instruments in accordance with accounting standards whereby the fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statement of operations as a component of cost of goods sold within the biodiesel segment.

 

FutureFuel recognizes all derivative instruments as either assets or liabilities at fair value in its consolidated balance sheet.  FutureFuel’s derivative instruments do not qualify for hedge accounting under the specific guidelines of ASC 815-20-25, Derivatives and Hedging, Hedging-General, Recognition. None of the derivative instruments are designated and accounted for as hedges due primarily to the extensive record keeping requirements.

 

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

 

		Asset (Liability)
		September 30, 2015								December 31, 2014
		Quantity (contracts) Short				Fair Value				Quantity (contracts) Short				Fair Value
Regulated options, included in other current assets*			(700	)		$	(1,612	)			(350	)		$	(794	)
Regulated fixed price future commitments, included in other current assets*			(275	)		$	(75	)			(225	)		$	862

 

*All derivative instruments are entered into with the standard contract terms and conditions in accordance with major trading authorities of the New York Mercantile Exchange.

 

Operating Expenses

 

Operating expenses were $2,742 and $2,697 in the three months ended September 30, 2015 and 2014, respectively, and $7,646 and $7,255, in the nine months ended September 30, 2015 and 2014, respectively. The increase in the nine month comparison period was attributed to the timing of recognition in stock compensation expense incurred in 2015 as compared to 2014.

 

Provision for Income Taxes 

 

The effective tax rate for the three months ended September 30, 2015 and 2014 reflects our expected tax rate on reported operating earnings before income tax and reflects the elimination of the small agri-biodiesel producer tax credit and the elimination of the tax credit for increasing research activities.

 

 

The effective tax rate for the nine months ended September 30, 2015 and 2014 reflects our expected tax rate on reported operating earnings before income tax and reflects the elimination of the small agri-biodiesel producer tax credit and the elimination of the tax credit for increasing research activities. Additionally, the effective tax rate for the nine months ended September 30, 2015 reflects changes in estimates concerning FutureFuel’s unrecognized tax benefits. FutureFuel’s effective tax rate for the nine months ended September 30, 2015 is lower than it otherwise would have been. This reduced rate is not expected to continue for the remainder of 2015.

 

Net Income

 

Net income for the quarter ended September 30, 2015 decreased 57.6% or $6,601 as compared to the same quarter in 2014, due primarily to the following after-tax items: (i) the graphite powder contract termination payment of $5,430 that was recognized in the third quarter of 2014 and did not recur in the third quarter 2015 and (ii) the $1,347 increase in cost of goods sold from adjustments in the carrying value of inventory as determined utilizing the LIFO method of inventory accounting.

 

Net income for the nine months ended September 30, 2015 decreased 27.3% or $6,298 during the same period in 2014, due primarily to the above mentioned contract termination payment.

  

Critical Accounting Estimates

 

Revenue Recognition

 

For most product sales, revenue is recognized when product is shipped from our facilities and risk of loss and title have passed to the customer, which is in accordance with our customer contracts and the stated shipping terms. Nearly all custom manufactured products are manufactured under written contracts. Performance chemicals and biodiesel are generally sold pursuant to the terms of written purchase orders. In general, customers do not have any rights of return, except for quality disputes. However, all of our products are tested for quality before shipment, and historically returns have been inconsequential. We do not offer rebates or other warranties.

  

Revenue from bill and hold transactions in which a performance obligation exists is recognized when the total performance obligation has been met and title to the product has transferred. Bill and hold transactions for the three months ended September 30, 2015 and 2014 related to specialty chemicals customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use. These sales were subject to written monthly purchase orders with agreement that production was reasonable. The inventory was custom manufactured and stored at the customer’s request and could not be sold to another buyer. Credit and payment terms for bill and hold customers are similar to other specialty chemicals customers. Sales revenue under bill and hold arrangements were $23,350 and $32,029 for the nine months ended September 30, 2015 and 2014, respectively.

 

Liquidity and Capital Resources 

 

Our net cash provided by (used in) operating activities, investing activities, and financing activities for the nine months ended September 30, 2015 and 2014 are set forth in the following chart.

 

(Dollars in thousands)

 

		Nine months ended September 30:
		2015				2014
Net cash provided by operating activities		$	59,922			$	26,486
Net cash provided by (used in) investing activities		$	1,628			$	(8,520	)
Net cash used by financing activities		$	(9,082	)		$	(15,797	)

 

Operating Activities

 

Cash from operating activities increased from $26,486 of cash provided by operating activities in the first nine months of 2014 to $59,922 of cash provided by operating activities in the first nine months of 2015. This increase was primarily attributable to the change in our accounts receivable, including accounts receivable from related parties. In the first nine months of 2015, the change in accounts receivable, including accounts receivable from related parties, increased cash provided by operating activities by $31,508. In the first nine months of 2014, the change in accounts receivable, including accounts receivable from related parties, decreased cash from operating activities by $366. The increase in cash from accounts receivable balances in 2015 as compared to 2014 was primarily related to the cash received for the BTC that was retroactively reinstated in December 2014 to January 1, 2014. 

 

 

Investing Activities

 

Cash provided by investing activities was $1,628 in the first nine months of 2015 as compared to cash used in investing activities in the first nine months of 2014 of $8,520. This change was primarily the result of net sales of some marketable securities in the first nine months of 2015 compared to the first nine months of 2014. Such net sales totaled $2,633 in the first nine months of 2014 and such net sales totaled $12,897 in the first nine months of 2015. Our capital expenditures and customer reimbursements for capital expenditures are summarized in the following table:

 

		Nine months ended September 30:
		2015				2014
Cash paid for capital expenditures and intangibles		$	7,437			$	6,691
Cash received as reimbursement of capital expenditures			(1,470	)			(901	)
Cash paid, net of reimbursement, for capital expenditures		$	5,967			$	5,790

 

Financing Activities

 

Cash used in financing activities decreased from $15,797 for the first nine months of 2014 to $9,082 of cash used in financing activities in the first nine months of 2015. This change is primarily the result of a decrease in cash used for dividend payments. In the first nine months of 2014, dividends paid totaled $15,681. In the first nine months of 2015, dividends paid totaled $7,870. Cash used for financing costs for the first nine months of 2015 were $721 and no such costs existed in the first nine months of 2014.

 

Credit Facility

 

Effective April 16, 2015, we entered into a new $150 million secured committed credit facility with a syndicated group of commercial banks. The loan is a revolving facility, the proceeds of which may be used for our working capital, capital expenditures, and general corporate purposes. The facility terminates on April 16, 2020 and replaces a $50 million asset-based line of credit with a commercial bank that was terminated upon commencement of the new line. See Note 6 – “Borrowings” in the Notes to our condensed consolidated financial statements for additional information regarding our Credit Agreement.

 

We intend to fund future capital requirements for our businesses from cash flow as well as from existing cash, cash investments, and, if the need should arise, borrowings under our credit facility. We do not believe there will be a need to issue any securities to fund such capital requirements.

 

Dividends

 

In the first three quarters of 2015, we paid a regular cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend was $2,623 in the first quarter of 2015, $2,624 in the second quarter of 2015, and $2,623 in the third quarter of 2015, amounting to aggregate dividend payments of $7,870 in the first nine months of 2015.

 

In the first three quarters of 2014, we paid a regular cash dividend in the amount of $0.12 per share on our common stock. The regular cash dividend was $5,201 in the first quarter of 2014, $5,233 in the second quarter of 2014, and $5,247 in the third quarter of 2014, amounting to aggregate dividend payments of $15,681 in the first nine months of 2014.

 

Capital Management

 

As a result of our initial equity offering, our subsequent positive operating results, the exercise of warrants, and the issuance of shares in our at-the-market offering, we accumulated excess working capital. Some of this excess working capital has been paid out as special and regular cash dividends. Additionally, regular cash dividends will be paid in 2015, as previously reported. Third parties have not placed significant restrictions on our working capital management decisions.

 

A significant portion of these funds were held in cash or cash equivalents at multiple financial institutions. In the periods ended September 30, 2015 and December 31, 2014, we also had investments in certain preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments. We classify these investments as current assets in the accompanying consolidated balance sheets and designate them as being “available-for-sale.” Accordingly, they are recorded at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity. The fair value of these preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments totaled $70,887 and $87,720 at September 30, 2015 and December 31, 2014, respectively.

 

Lastly, we maintain depositary accounts such as checking accounts, money market accounts, and other similar accounts at selected financial institutions.

 

 

Off-Balance Sheet Arrangements

 

We engage in two types of hedging transactions. First, we hedge our biofuels sales through the purchase and sale of futures contracts and options on futures contracts of energy commodities. This activity was captured on our balance sheet at September 30, 2015 and December 31, 2014. Second, we hedge our biofuels feedstock through the execution of purchase contracts and supply agreements with certain vendors. These hedging transactions are recognized in earnings and were not recorded on our balance sheet at September 30, 2015 or December 31, 2014 because they do not meet the definition of a derivative instrument as defined under accounting principles generally accepted in the U.S. The purchase of biofuels feedstock generally involves two risk components: basis and price. Basis covers any refining or processing required as well as transportation. Price covers the purchases of the actual agricultural commodity. Both basis and price fluctuate over time. A supply agreement with a vendor constitutes a hedge when we have committed to a certain volume of feedstock in a future period and have fixed the basis for that volume.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

In recent years, general economic inflation has not had a material adverse impact on our costs and, as described elsewhere herein, we have passed some price increases along to our customers. However, we are subject to certain market risks as described below.

 

Market risk represents the potential loss arising from adverse changes in market rates and prices. Commodity price risk is inherent in the chemicals and biofuels business both with respect to inputs (electricity, coal, raw materials, biofuels feedstock, etc.) and outputs (manufactured chemicals and biofuels).

 

We seek to mitigate our market risks associated with the manufacturing and sale of chemicals by entering into term sale contracts that include contractual market price adjustment protections to allow changes in market prices of key raw materials to be passed on to the customer. Such price protections are not always obtained, however, and some raw material price risk remains significant.

 

In order to manage price risk caused by market fluctuations in biofuels prices, we may enter into exchange traded commodity futures and options contracts. We account for these derivative instruments in accordance with ASC 815-20-25, Derivatives and Hedging, Hedging-General, Recognition. Under this standard, the accounting for changes in the fair value of a derivative instrument depends upon whether it has been designated as an accounting hedging relationship and, further, on the type of hedging relationship. To qualify for designation as an accounting hedging relationship, specific criteria must be met and appropriate documentation maintained. We had no derivative instruments that qualified under these rules as designated accounting hedges in the first nine months of 2015 or 2014. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the statement of operations as a component of cost of goods sold within the biodiesel segment.

 

Our immediate recognition of derivative instrument gains and losses can cause net income to be volatile from period to period due to the timing of the change in value of the derivative instruments relative to the volume of biofuel being sold. As of September 30, 2015 and December 31, 2014, the fair values of our derivative instruments were a net liability in the amount of $1,687 and a net asset of $68, respectively.

 

Our gross profit will be impacted by the prices we pay for raw materials and conversion costs (costs incurred in the production of chemicals and biofuels) for which we do not possess contractual market price adjustment protection. These items are principally comprised of crude corn oil and yellow grease and petrodiesel. The availability and price of these items are subject to wide fluctuations due to unpredictable factors such as weather conditions, overall economic conditions, governmental policies, commodity markets, and global supply and demand.

 

We prepared a sensitivity analysis of our exposure to market risk with respect to key raw materials and conversion costs for which we do not possess contractual market price adjustment protections, based on average prices for the first nine months of 2015. We included only those raw materials and conversion costs for which a hypothetical adverse change in price would result in a 1% or greater decrease in gross profit. Assuming that the prices of the associated finished goods could not be increased and assuming no change in quantities sold, a hypothetical 10% change in the average price of the commodity listed below would result in the following change in gross profit.

(Volume and dollars in thousands)

 

Item		Volume Requirements(a)			Units		Hypothetical Adverse Change in Price				Decrease in Gross Profit				Percentage Decrease in Gross Profit
Crude corn oil and yellow grease			221,079		LB			10%			$	6,102				22.2	%
Petrofuels			15,253		GAL			10%			$	2,690				9.8	%
Methanol			87,065		LB			10%			$	1,654				6.0	%
Electricity			79		MWH			10%			$	471				1.7	%
Natural Gas			992		MCF			10%			$	320				1.2	%
Sodium methylate			7,089		LB			10%			$	301				1.1	%
Coal			34		Ton			10%			$	268				1.0	%

 

     (a) Volume requirements and average price information are based upon volumes used and prices obtained for the nine months ended September 30, 2015.  Volume requirements may differ materially from these quantities in future years as our business evolves.

 

We had no borrowings as of September 30, 2015 or December 31, 2014 and, as such, we were not exposed to interest rate risk for those periods. Due to the relative insignificance of transactions denominated in foreign currency, we consider our foreign currency risk to be immaterial.

 

 

Item 4. Controls and Procedures.

 

Under the supervision and with the participation of our chief executive officer and our principal financial officer and other senior management personnel, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and our principal financial officer have concluded that these disclosure controls and procedures as of September 30, 2015 were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

 

There were no changes in our internal control over financial reporting during our last fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are not a party to, nor is any of our property subject to, any material pending legal proceedings, other than ordinary routine litigation incidental to our business. However, from time to time, we may be a party to, or a target of, lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which we expect to be handled and defended in the ordinary course of business. While we are unable to predict the outcome of any matters currently pending, we do not believe that the ultimate resolution of any such pending matters will have a material adverse effect on our overall financial condition, results of operations, or cash flows. However, adverse developments could negatively impact earnings or cash flows in future periods.

 

Item 1A. Risk Factors.

 

There have been no material changes to the risk factors we previously disclosed in Item 1A of our Form 10-K, Annual Report for the year ended December 31, 2014 filed with the SEC on March 13, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information. 

 

None.

 

Item 6. Exhibits.

 

Exhibit	Description
10.1	Fifth Amendment to the Purchase Agreement made and entered into as of September 30, 2015 between The Procter & Gamble Manufacturing Company, Procter & Gamble International Operations SA, Procter & Gamble International Operations SA Singapore Branch, Procter & Gamble Home Products Limited, as buyer, and FutureFuel Chemical Company, as seller (portions of the exhibit have been omitted pursuant to a request for confidential treatment).
11.	Statement re Computation of per Share Earnings
31(a).	Rule 13a-15(e)/15d-15(e) Certification of chief executive officer
31(b).	Rule 13a-15(e)/15d-15(e) Certification of chief principal officer
32.	Section 1350 Certification of chief executive officer and principal financial officer
101	Interactive Data Files**
101.INS	XBRL Instance
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Labels
101.PRE	XBRL Taxonomy Extension Presentation
**	Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

 

Special Note Regarding Forward Looking Information

 

This report, and the documents incorporated by reference into this report contain forward-looking statements. Forward-looking statements deal with our current plans, intentions, beliefs, and expectations, and statements of future economic performance. Statements containing such terms as “believe,” “do not believe,” “plan,” “expect,” “intend,” “estimate,” “anticipate,” and other phrases of similar meaning are considered to contain uncertainty and are forward-looking statements. In addition, from time to time we or our representatives have made or will make forward-looking statements orally or in writing. Furthermore, such forward-looking statements may be included in various filings that we make with the SEC, or in press releases, or in oral statements made by or with the approval of one of our authorized executive officers.

 

These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause actual results to differ include, but are not limited to, those set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in FutureFuel’s Form 10-K Annual Report for the year ended December 31, 2014 and in our future filings made with the SEC. You should not place undue reliance on any forward-looking statements contained in this report which reflect our management’s opinions only as of their respective dates. Except as required by law, we undertake no obligation to revise or publicly release the results of any revisions to forward-looking statements. The risks and uncertainties described in this report and in subsequent filings with the SEC are not the only ones we face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that we currently believe are immaterial to our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If any such risks occur, our business, operating results, liquidity, and financial condition could be materially affected in an adverse manner. You should consult any additional disclosures we have made or will make in our reports to the SEC on Forms 10-K, 10-Q, and 8-K, and any amendments thereto. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FUTUREFUEL CORP.

 

By:	/s/ Paul A. Novelly
Paul A. Novelly, Chairman and Chief Executive Officer
Date:  November 9, 2015

 

 

By:	/s/ Rose M. Sparks
Rose M. Sparks, Chief Financial Officer and Principal Financial Officer
Date:  November 9, 2015

 

 

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