FUTUREFUEL CORP. The following Management's Discussion and Analysis of Financial Condition and Results of Operations ofFutureFuel Corp. ("FutureFuel", "the Company", "we", or "our") should be read together with our consolidated financial statements, including the notes thereto, set forth herein. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Actual results may differ materially from those anticipated in these forward-looking statements. See "Forward-Looking Information" below for additional discussion regarding risks associated with forward-looking statements.
Unless otherwise stated, all dollar amounts are in thousands.
Overview
Our company is managed and reported in two reporting segments: chemicals and biofuels. Within the chemical segment are two product groupings: custom chemicals and performance chemicals. The custom product group is composed of specialty chemicals manufactured for a single customer whereas the performance product group is composed of chemicals manufactured for multiple customers. The biofuels segment is composed 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. Within theUnited States Environmental Protection Agency (EPA) Renewable Fuel Standard (RFS), we generate 1.5 Renewable Identification Numbers (RINs) for each gallon of biodiesel sold inthe United States with a classification of a D4 RIN. RINs are used to monitor the level of renewable fuel traded in a given year in accordance with RFS 2 within the EPA moderated transaction system (EMTS). We do not assign cost of goods sold to the generation of RINs as the physical fuel generates the full cost. We do not purchase RINs. As ofMarch 31, 2022 , we held 3.6 million D4 RINs with a market value of$5,314 . COVID-19 During the COVID-19 pandemic, our objectives have been to protect the well-being of our employees, support our customers, obtain materials from our suppliers, and maintain our manufacturing operations. While the pandemic has reduced the overall level of activity across much of the economy, we have largely met these objectives. As the pandemic has evolved, we have seen its effects disrupt supply chains and labor markets in often unpredictable ways. The three principles areas where COVID-19 may still negatively impact our financial performance are customer demand, raw material procurement, and our ability to operate our manufacturing facility. Customer Demand - Several of our major chemical customers sell the products we produce for them into markets that have been impacted by COVID-19, particularly the energy and automotive markets. However, demand on the whole has recovered from the immediate disruption caused by COVID-19, although it has not yet returned to pre-pandemic volumes. COVID-19 is only one of many factors influencing the energy markets at the moment and we closely align our biodiesel production to match that demand when margins are positive. Supply Chain Impact - Our initial concern was that supplier shutdowns might result in raw material or input shortages and negatively impact our ability to manufacture products and meet our customers' demands. While we have managed supply such that our operations have not been significantly hindered by shortages, timing of deliveries and supply chain disruptions have on occasion tempered demand from our customers. 15 -------------------------------------------------------------------------------- Operations Impact - Two years into the pandemic, we have shown that our mitigation measures have been pragmatic and effective, even at the height of the Omicron variant. However, each wave has presented different challenges and we will remain agile and flexible in our response to any future variant or surge. To date we have had no negative impact on our ability to operate the plant safely and in a way that meets our customers' demands. COVID-19 will be with us for some time, either as an on-going outbreak or as a future threat. As such, we may continue to experience materially adverse impacts on our financial condition and results of operations.
Summary of Financial Results
Set forth below is a summary of certain consolidated financial information for
the periods indicated.
Three Months Ended March 31,
Dollar %
2022 2021 Change Change
Revenue $ 42,261 $ 41,516 $ 745 2 %
Loss from operations $ (9,607 ) $ (13,058 ) $ 3,451 (26 %)
Net loss $ (12,398 ) $ (8,773 ) $ (3,625 ) (41 %)
Earnings per common share:
Basic $ (0.28 ) $ (0.20 ) $ (0.08 ) (40 %)
Diluted $ (0.28 ) $ (0.20 ) $ (0.08 ) (40 %)
Adjusted EBITDA $ 2,098 $ (7,825 ) $ 9,923 NA
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. This measure isolates 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).
16
--------------------------------------------------------------------------------
We utilize commodity derivative instruments primarily to protect our operations
from downward movements in commodity prices, and to provide greater certainty of
cash flows associated with sales of our commodities. We enter into hedges, and
we utilize mark-to-market accounting to account for these instruments. Thus, our
results in any given period can be impacted, and sometimes significantly, by
changes in market prices relative to our contract price along with the timing of
the valuation change in the derivative instruments relative to the sale of
biofuel. We include this item as an adjustment as we believe it provides a
relevant indicator of the underlying performance of our business in a given
period.
Additionally, we invest in marketable securities of certain debt securities
(trust preferred stock ) and in preferred stock and other equity instruments.
The realized and unrealized gains and losses on these marketable securities can
fluctuate significantly from period to period. We include this item as an
adjustment as we believe it provides a relevant indicator of the underlying
performance of our business in a given period.
The following table reconciles net income, the most directly comparable GAAP performance financial measure, with adjusted EBITDA.
Three Months Ended March 31,
2022 2021
Net loss $ (12,398 ) $ (8,773 )
Depreciation 2,570 2,608
Interest and dividend income (664) (1,005 )
Non-cash interest expense and amortization of
deferred financing costs 32 32
Loss on disposal of property and equipment 6 -
Loss on derivative instruments 9,129 2,625
Loss on marketable securities 4,127 1,075 Income tax benefit (704 ) (4,387 ) Adjusted EBITDA $ 2,098$ (7,825 )
The following table reconciles cash flows from operations, the most directly comparable GAAP liquidity financial measure, with adjusted EBITDA.
Three Months Ended March 31,
2022 2021
Net cash used in operating activities $ (10,576 ) $ (14,347 )
Benefit for deferred income taxes 719 4,402
Interest and dividend income (664 ) (1,005 )
Income tax benefit (704 ) (4,387 )
Loss on derivative instruments 9,129 2,625
Change in fair value of derivative instruments 1,536
695
Change in operating assets and liabilities, net 2,658 4,192 Adjusted EBITDA$ 2,098 $ (7,825 ) 17
--------------------------------------------------------------------------------
Results of Operations
Consolidated
Three Months Ended March 31,
Change
2022 2021 Amount %
Revenues $ 42,261 $ 41,516 $ 745 1.8 %
Volume/product mix effect $ (10,178 ) (24.5 %)
Price effect $ 10,923 26.3 %
Gross loss $ (7,155 ) $ (10,736 ) $ 3,581 33.4 %
Operating expenses (2,452 ) (2,322 ) 130 5.6 %
Other expense (3,495 ) (102 ) 3,393 3,326.5 %
Income tax benefit (704 ) (4,387 ) 3,683 (84.0 %)
Net loss $ (12,398 ) $ (8,773 ) $ (3,625 ) (41. 3%)
Consolidated revenue in the three months ended March 31, 2022 increased 1.8% or
$745 compared to the three months ended March 31, 2021 . This increase resulted
from increased sales prices in both the chemicals and biofuels segments
and increased sales volume in the chemical segment which was partially offset by
reduced sales volumes in the biofuel segment.
Gross loss in the three months ended March 31, 2022 was $7,155 as compared to
$10,736 in the three months ended March 31, 2021 . This decline primarily
resulted from the change in the activity in derivative instruments with a loss
of $9,129 in the three months ended March 31, 2022 , as compared to $2,625 in the
three months ended March 31, 2021 whereas inventories related to this change
have not yet been sold. See note 5 to our consolidated financial
statements. Affordable feedstocks were acquired and converted to biodiesel which
will be sold mostly in the three months ended June 30, 2022 . Partially reducing
gross losses was the change in the adjustment in the carrying value of our
inventory as determined utilizing the LIFO method of inventory accounting. This
adjustment increased gross profit $481 in the three months ended March 31, 2022
as compared to a decrease of $3,913 in the prior year quarter. See note 4 of
our consolidated financial statements for additional detail. In addition, the
prior year quarter was negatively impacted by the exorbitant natural gas prices
invoiced from Winter Storm Uri which resulted in an addition to cost of goods
sold of $7,800 with a reduction in production volumes given the natural gas
curtailment.
Operating expenses
Operating expenses increased
Other expense Other expense was$3,495 in the three months endedMarch 31, 2022 , as compared to the same period of the prior year of$102 which was primarily from the change in unrealized losses on marketable securities. Income tax benefit The Company's effective tax rate for the three months endedMarch 31, 2022 was unfavorably impacted by the assessment that the carryforwards of its 2022 net operating loss and tax credits would not more likely than not be realizable in full. Because the tax benefit of the year to date loss is greater than the anticipated realizable value of tax benefit of the full year loss, the year to date benefit has been limited to the anticipated full year benefit pursuant to ASC 740. In contract, because the Company was unable to reliably estimate its annual effective tax rate for the three months endedMarch 31, 2021 , the tax benefit was determined by applying an actual year-to-date effective rate to year-to-date pretax income. The effective tax rate for the three months endedMarch 31, 2021 reflected the positive effects of certain tax credits and incentives, the most significant of which are the BTC and Small Agri-biodiesel Producer Tax Credit. While the Company remains eligible for these credits in 2022, realizability concerns have limited their impacts on the effective rate. Additionally, the net income tax benefit for the three months endedMarch 31, 2022 was unfavorably impacted by the recognition of tax expense for valuation allowances against various tax attributes existing atJanuary 1, 2022 . The Company evaluates its deferred tax assets quarterly and records a valuation allowance to reduce these assets to the amount that is more likely than not to be realized. During the first quarter of 2022, based on all available evidence, the Company determined that portions of its deferred tax assets for carryforwards of capital losses, state tax credits, and state net operating losses expiring in the next ten years are not more likely than not to be realized. 18
--------------------------------------------------------------------------------
Chemical Segment
Three Months Ended March 31,
Change
2022 2021 Amount %
Revenues $ 21,561 $ 16,110 $ 5,451 33.8 %
Volume/product mix effect $ 1,190 7.4 %
Price effect $ 4,261 26.4 %
Gross profit (loss) $ 5,418 $ (1,301 ) $ 6,719 NA
Chemical revenue in the three months ended March 31, 2022 increased 33.8% or
$5,451 compared to the three months ended March 31, 2021 . Revenue for our custom
chemicals (unique chemicals produced under contract for specific customers) for
the three months ended March 31, 2022 totaled $15,715 , an increase of
$5,040 from the same period in 2021. Two custom chemicals used in the energy
and microbial control industries experienced stronger volumes and higher selling
prices. Performance chemicals (composed of multi-customer products which are
sold to the open market based on specification) revenue was $5,846 , an increase
of $411 from the three months ended March 31, 2021 . This increase was from
increased sales volume of glycerin partially offset by the production timing of
certain products which are produced batch-wise during the course of the year.
There was also a weaker market for our monomer additive.
Gross profit for the chemical segment for the three months ended March 31, 2022 ,
increased $6,719 when compared to the same period of 2021 from increased sales
as noted above and the absence of the unusually high natural gas price in the
prior year period.
19--------------------------------------------------------------------------------
Biofuels Segment
Three Months Ended March 31,
Change
2022 2021 Amount %
Revenues $ 20,700 $ 25,406 $ (4,706 ) (18.5 %)
Volume/product mix effect $ (11,368 ) (44.7 %)
Price effect $ 6,662 26.2 %
Gross loss $ (12,573 ) $ (9,435 ) $ (3,138 ) (33.3 %)
Biofuels revenue in the three months ended March 31, 2022 decreased 18.5% or
$4,706 as compared to the same period of 2021. The biodiesel and biodiesel blend
volumes decreased as compared to the prior year, primarily from the availability
of economical feedstock. Offsetting this volume decrease as compared to the same
period of 2021, was higher selling prices with the overall improvement in the
fuel industry and from improved RIN prices.
A significant portion of our biodiesel sold was to one major refiner/blender in
the three months ended March 31, 2022 and to two major refiners in the first
quarter of 2021. No assurances can be given that we will continue to sell to
such major refiners, or, if we do sell, the volume we will sell or the profit
margin we will realize. We do not believe that the loss of this customer would
have a material adverse effect on our biofuels segment or on us as a whole
because: (i) we believe that we could readily sell our biodiesel to other
customers as potential demand from other customers for biodiesel exceeds our
production capacity; (ii) our sales to these customers are not under fixed terms
and the customers have no fixed obligation to purchase any minimum quantities
except as stipulated by short-term purchase orders; and (iii) the prices we
receive from these customers are based upon then-market rates, as would be the
case with sales of this commodity to other customers.
Biofuels gross loss was $12,573 in the three months ended March 31, 2022 , an
increased loss of $3,138 from the same period of 2021. This increased loss was
from: i) the change in the activity in derivative instruments with a loss of
$9,129 in the three months ended March 31, 2022 , as compared to $2,625 in the
three months ended March 31, 2021 whereas inventories related to this change
have not yet been sold (See note 5 of our consolidated financial statements),
and ii) a reduction in biodiesel margins. Partially offsetting the gross losses
were i) the change in adjustments in the carrying value of our inventory as
determined utilizing the LIFO method of inventory accounting as compared to an
increase in gross profit in the same period of 2021; this adjustment decreased
gross losses this period $967 as compared to $3,243 in the same prior year
period. Also note, the loss in the three months ended March 31, 2021 was
driven by Winter Storm Uri which dramatically increased the price of natural gas
and consequently reduced sales volumes when production was curtailed to minimize
natural gas consumption.
In regards to our derivative activity, we recognize all derivative instruments
as either assets or liabilities at fair value in our consolidated balance
sheets. The realized and unrealized derivative gains and losses are recorded as
cost of goods sold. Our derivative instruments do not qualify for hedge
accounting under the specific guidelines of Topic 815, Derivatives and Hedging.
None of the derivative instruments are designated and accounted for as hedges
primarily due to the extensive record keeping requirements.
20
--------------------------------------------------------------------------------
The volumes and carrying values of our derivative instruments were as follows:
Asset (Liability)
March 31, 2022 December 31, 2021
Contract
Contract Quantity Fair Value Quantity Fair Value
Regulated fixed price future commitments
(in thousand barrels) 250 $ 1,051 142 $ (485 ) *All derivative instruments are entered into with the standard contract terms
and conditions in accordance with major trading authorities of the
Critical Accounting Estimates
Revenue Recognition The Company recognizes revenue under Topic 606, Revenue from Contracts with Customers. Certain long-term contracts had upfront non-cancellable payments considered material rights. The Company applied the renewal option approach in allocating the transaction price to the material rights. For each of these contracts, the Company estimated the expected contractual volumes to be sold at the most likely expected sales price as a basis for allocating the transaction price to the material right. Estimates are updated quarterly on a prospective basis. These custom chemical contracts have payment terms of 30 days. See Note 3 to our consolidated financial statements. For most product sales, revenue is recognized when product is shipped from our facilities and risk of loss and title have passed to the customer, which is in accordance with our customer contracts and the stated shipping terms. Nearly all custom manufactured products are manufactured under written master service agreements. Performance chemicals and biodiesel are generally sold pursuant to the terms of written purchase orders. In general, customers do not have any rights of return, except for quality disputes. All of our products are tested for quality before shipment, and historically returns have been inconsequential. We do not offer rebates, except those related to the BTC. Biodiesel selling prices can at times fluctuate based on the timing of unsold, internally generated RINs. From time to time, sales of biodiesel are on a "RINs-free" basis. Such method of selling results in applicable RINs being held. The value of the RINs is not reflected in revenue until such time as the RIN sale has been completed. Revenue from bill-and-hold transactions in which a performance obligation exists is recognized when the total performance obligation has been met and control of the product has transferred. Bill-and-hold transactions for the three months endedMarch 31, 2022 and 2021 were related to custom chemicals customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use by the customer. These sales were subject to written monthly purchase orders with agreement that production was reasonable. The product was custom manufactured and stored at the customer's request and could not be sold to another buyer. Credit and payment terms for bill-and-hold customers are similar to other custom chemicals customers. Revenues under bill-and-hold arrangements were$9,276 and$7,549 for the three months endedMarch 31, 2022 and 2021, respectively. 21 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our net cash from operating activities, investing activities, and financing activities for the three months endedMarch 31, 2022 and 2021 are set forth in the following table. Three Months Ended March 31, 2022 2021 Net cash used in operating activities$ (10,576 ) $ (14,347 ) Net cash (used in) provided by investing activities$ (3,335 ) $ 12,828 Net cash used in financing activities$ (2,626 ) $ (2,624 ) We believe that existing cash balances and cash flow to be generated from operating activities and borrowing capacity under the amended and restated credit agreement will be sufficient to fund operations, product development, cash dividends, and capital requirements for the foreseeable future. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Operating Activities Cash used in operating activities was$10,576 in the three months endedMarch 31, 2022 as compared to$14,347 in the same period of 2021. This increase was primarily attributable to the change in accounts receivable, including accounts receivable - related parties, demonstrating a cash inflow of$16,466 in the three months endedMarch 31, 2022 compared to the same period of 2021 primarily from the timing of customer payments. Partially offsetting cash inflow was a net change in accounts payable, including accounts payable-related parties, demonstrating a cash outflow of$12,757 primarily from the timing of vendor payments. Also note, cash used for inventories was similar in each three-month period of 2022 and 2021,$10,700 and$11,389 , respectively. Investing Activities Cash used by investing activities was$3,335 in the three months endedMarch 31, 2022 as compared to cash provided by investing activities of$12,828 in the three months endedMarch 31, 2021 . Of the$16,163 of change,$12,830 was the result of a decrease in net sales of marketable securities. Such net sales totaled$250 , in the first three months of 2022, compared to$13,080 in net sales in the first three months of 2021. The remaining change resulted from an increase in the collateralization of derivative instruments of$2,558 and an increase in capital expenditures of$831 . Financing Activities
Cash used in financing activities was
22
--------------------------------------------------------------------------------Credit Facility We have a credit agreement with a syndicated group of commercial banks for$100,000 as amended onMarch 30, 2020 . 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 onMarch 30, 2025 . See Note 9 to our consolidated financial statements for additional information regarding our Credit Agreement. We intend to fund future capital requirements for our businesses from cash flow as well as from existing cash, cash investments, and, if the need should arise, borrowings under our credit facility. We do not believe there will be a need to issue any securities to fund such capital requirements. Dividends OnFebruary 1, 2022 , we declared a quarterly cash dividend program of$0.06 per common share. In the three months endedMarch 31, 2022 and 2021, we paid a regular quarterly cash dividend in the amount of$0.06 per share on our common stock. The regular cash dividend amounted to$2,626 in the three months endedMarch 31, 2022 and$2,624 in the three months endedMarch 31, 2021 . 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 dividends will be paid in 2022, as previously reported. Third parties have not placed significant restrictions on our working capital management decisions. A significant portion of these funds was held in cash or cash equivalents at multiple financial institutions. In the periods endedMarch 31, 2022 andDecember 31, 2021 , we also had investments in certain preferred stock, debt securities, and other equity instruments. We classify these investments as current assets in the accompanying consolidated balance sheets and designate the debt securities as being "available-for-sale." Accordingly, the debt securities are recorded at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders' equity. We also held equity securities with readily available market values. These equity instruments are recorded at fair value, with the unrealized gains and losses reported as a component of net income. The fair value of the debt securities and equity instruments totaled$42,751 and$47,190 atMarch 31, 2022 andDecember 31, 2021 , respectively.
Lastly, we maintain depositary accounts such as checking accounts, money market accounts, and other similar accounts at selected financial institutions.
23
--------------------------------------------------------------------------------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 in our consolidated balance sheets atMarch 31, 2022 andDecember 31, 2021 . Second, we hedge our biofuels feedstock through the execution of purchase contracts and supply agreements with certain vendors or they meet the normal purchase and normal sales exception of ASC 815 Derivatives and Hedging. These hedging transactions are recognized in earnings and were not recorded in our consolidated balance sheets atMarch 31, 2022 orDecember 31, 2021 because they do not meet the definition of a hedge instrument as defined under GAAP. The purchase of biofuels feedstock generally involves two risk components: basis and price. Basis covers any refining or processing required as well as transportation. Price covers the purchases of the actual agricultural commodity. Both basis and price fluctuate over time. A supply agreement with a vendor constitutes a hedge when we have committed to a certain volume of feedstock in a future period and have fixed the basis for that volume. 24
--------------------------------------------------------------------------------
© Edgar Online, source
