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. COVID-19 InMarch 2020 , theWorld Health Organization categorized COVID-19 as a pandemic and it continues to spread throughoutthe United States and other countries across the world. During the 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. While the worst effects of the pandemic may be behind us inthe United States , the virus is still spreading worldwide and the long-term economic consequences globally are still unclear, making its impact on our performance still difficult to predict. 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 in to markets that have been significantly impacted by COVID-19. The energy and automotive markets in particular have drastically been impacted since April, 2020 and have not yet fully recovered to pre-pandemic levels. However, diesel prices and the value of Renewable Identification Numbers (RINs) have improved significantly in 2021 and while promising, this recovery is still fragile. 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. This was true initially in our biofuel segment and the impact that had on the industry as a whole is part of the reason RINs have increased in value. We have managed supply such that our operations have not been hindered by shortages thus far and will continue in that effort. 16
-------------------------------------------------------------------------------- Operations Impact - Our manufacturing is considered critical services and our plant has remained open to meet customer demand during the COVID-19 pandemic. The policies that were implemented including social distancing, enhanced cleaning and sanitizing, and the wearing of masks, have proven successful in preventing the spread of COVID-19 on-site. We will continue to take actions to help prevent the spread of COVID-19 at work and adjust policies as necessary. 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.
Even after the COVID-19 outbreak has subsided, 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 %
2021 2020 Change Change
Revenue $ 41,516 $ 53,082 $ (11,566 ) (22 %)
(Loss) income from operations $ (13,058 ) $ 13,979 $ (27,037 ) (193 %)
Net (loss) income $ (8,773 ) $ 19,043 $ (27,816 ) (146 %)
Earnings per common share:
Basic $ (0.20 ) $ 0.44 $ (0.64 ) (145 %)
Diluted $ (0.20 ) $ 0.44 $ (0.64 ) (145 %)
Adjusted EBITDA $ (7,825 ) $ 10,177 $ (18,002 ) (177 %)
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).
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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 exchange-traded debt instruments) 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,
2021 2020
Net (loss) income $ (8,773 ) $ 19,043
Depreciation 2,608 3,004
Non-cash stock-based compensation - 49
Interest and dividend income (1,005 ) (1,967 )
Non-cash interest expense and amortization of
deferred financing costs 32 56
Loss on disposal of property and equipment - 2
Loss (gain) on derivative instruments 2,625 (6,857 )
Loss on marketable securities 1,075 10,059
Income tax benefit (4,387 ) (13,212 )
Adjusted EBITDA $ (7,825 ) $ 10,177 The following table reconciles cash flows from operations, the most directly comparable GAAP liquidity financial measure, with adjusted EBITDA.
Three Months Ended March 31,
2021 2020
Net cash (used in) provided by operating activities
$ 4,034 Benefit for deferred income taxes 4,402 22 Interest and dividend income (1,005 ) (1,967 ) Income tax benefit (4,387 ) (13,212 ) (Loss) gain on derivative instruments 2,625 (6,857 ) Change in fair value of derivative instruments 695 1,874 Change in operating assets and liabilities, net 4,192 26,282 Other - 1 Adjusted EBITDA$ (7,825 ) $ 10,177 18
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Results of Operations
Consolidated
Three Months Ended March 31,
Change
2021 2020 Amount %
Revenues $ 41,516 $ 53,082 $ (11,566 ) (21.8 %)
Volume/product mix effect $ (19,439 ) (36.6 %)
Price effect $ 7,873 14.8 %
Gross (loss) profit $ (10,736 ) $ 16,399 $ (27,135 ) (165.5 %)
Operating expenses 2,322 2,420 (98 ) (4.0 %)
Other expense (102 ) (8,148 ) 8,046 (98.7 %)
Income tax benefit (4,387 ) (13,212 ) 8,825 (66.8 %)
Net (loss) income $ (8,773 ) 19,043 (27,816 ) (146.1 %)
Consolidated revenue in the three months ended
Gross loss in the three months endedMarch 31, 2021 was$10,736 as compared to gross profit of$16,399 in the three months endedMarch 31, 2020 . This decline primarily resulted from: i) exorbitant natural gas prices invoiced from Winter Storm Uri which resulted in an increase of$7,800 as compared to the prior year quarter, ii) a reduction in production volumes given the natural gas curtailment, iii) the change in the unrealized and realized activity in derivative instruments with a loss of$2,625 in the three months endedMarch 31, 2021 as compared to a gain of$6,857 in the three months endedMarch 31, 2020 and iv) the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment decreased gross profit$3,913 in the three months endedMarch 31, 2021 as compared to an increase in gross profit of$1,319 in the prior year quarter. As a result of the extraordinary increase in natural gas prices, the Attorney General ofArkansas has launched a civil investigative demand against several natural gas suppliers. At this time the company is disputing theFebruary 2021 natural gas bill and payment thereof is pending further investigation. See Notes 13 and 16 of the consolidated financial statements for further details. Operating expenses
Operating expenses decreased
Other expense Other expense was$102 in the three months endedMarch 31, 2021 , as compared to the same period of the prior year of$8,148 which was primarily from the change in unrealized losses on marketable securities. Income tax benefit Because the Company is unable to reliably estimate its annual effective tax rate for the three months endedMarch 31, 2021 , it has determined its income tax benefit by applying its actual year to date effective tax rate to year-to-date pretax income. In contrast, the tax benefit for the three months endedMarch 31, 2020 reflects the application of an estimated annual effective tax rate to year-to-date pretax income. The effective tax rates for both periods reflect the positive effects of certain tax credits and incentives, the most significant of which are the BTC and Small Agri-biodiesel Producer Tax Credit. Additionally, the effective rate for the three months endedMarch 31, 2020 was favorably impacted by the enhanced NOL carryback provisions of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). This law, enacted onMarch 27, 2020 , allowed the Company to carry back its 2020 federal tax loss to a year with a higher tax rate rather than forward to a year with a lower rate. 19
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Net income Net income for the three months endedMarch 31, 2021 decreased$27,816 as compared to the same period in 2020. This decrease resulted primarily from the changes explained in gross (loss) profit as previously noted, Other expense, and Income tax benefit. Chemical Segment Three Months Ended March 31, Change 2021 2020 Amount % Revenues$ 16,110 $ 27,693 $ (11,583 ) (41.8 %) Volume/product mix effect$ (11,697 ) (42.2 %) Price effect$ 114 0.4 % Gross (loss) profit$ (1,301 ) $ 8,014 $ (9,315 ) (116.2 %) Chemical revenue in the three months endedMarch 31, 2021 decreased 41.8% or$11,583 compared to the three months endedMarch 31, 2020 . Revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months endedMarch 31, 2021 totaled$10,675 , a decrease of$13,085 from the same period in 2020. Two products we no longer sell benefited the prior year revenue$8,097 , the remaining decrease was primarily from lower sales volumes with the natural gas curtailment and COVID-19. Performance chemicals (composed of multi-customer products which are sold based on specification) revenue was$5,435 , an increase of$1,502 from the three months endedMarch 31, 2020 . This increase was primarily from increased sales volume of glycerin and the timing of campaign products, although market conditions were more supportive than during the same period of last year. Gross profit for the chemical segment for the three months endedMarch 31, 2021 , decreased$9,315 when compared to the same period of 2020 driven mostly by the unusually high natural gas price, the loss of sales volume in our custom chemical products primarily driven by the effects of COVID-19 on customer demand, and the loss of two custom chemical products we no longer sale. Also reducing gross profit in three-month periods endedMarch 31, 2021 was 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 2020; this adjustment decreased gross profit$670 and increased gross profit$502 , respectively. 20 --------------------------------------------------------------------------------
Biofuels Segment
Three Months Ended March 31,
Change
2021 2020 Amount %
Revenues $ 25,406 $ 25,389 $ 17 0.1 %
Volume/product mix effect $ (7,742 ) (30.5 %)
Price effect $ 7,759 30.6 %
Gross (loss) profit $ (9,435 ) $ 8,385 $ (17,820 ) (212.5 %)
Biofuels revenue in the three months ended March 31, 2021 was flat as compared
to the same period of 2020. The biodiesel and biodiesel blend volumes decreased
as compared to the prior year, primarily from the impact of Winter Storm Uri of
approximately $3,000 . Offsetting this volume decrease as compared to the same
period of 2020, was higher selling prices with the overall improvement in fuel
and RIN prices.
A significant portion of our biodiesel sold was to two major refiner/blenders in
the three months ended March 31, 2021 and in the first quarter of 2020 there
were no significant customer concentrations. 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 $9,435 in the three months ended March 31, 2021 , as
compared to a gross profit of $8,385 in the same period of 2020, primarily from:
i) the impact of 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, further exacerbated by delays in restarting
caused by the freezing weather, ii) the change in the activity in derivative
instruments with a loss of $2,625 in the three months ended March 31, 2021 , as
compared to a gain of $6,857 in the three months ended March 31, 2020 , and iii)
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 2020; this adjustment decreased gross profit
$3,243 and increased gross profit $817 , respectively.
We recognize all derivative instruments as either assets or liabilities at fair
value in our consolidated balance sheets. 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.
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The volumes and carrying values of our derivative instruments were as follows:
Asset (Liability)
March 31, 2021 December 31, 2020
Contract
Quantity Contract
Short Fair Value Quantity Short Fair Value
Regulated fixed price future commitments 265 $ (819 ) 250 $ 124 *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, 2021 and 2020 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. Revenue under bill-and-hold arrangements were$7,549 and$10,153 for the three months endedMarch 31, 2021 and 2020, respectively. 22 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our net cash from operating activities, investing activities, and financing activities for the three months endedMarch 31, 2021 and 2020 are set forth in the following table. Three Months EndedMarch 31, 2021 2020
Net cash (used in) provided by operating activities
$ 12,828 $ 3,838 Net cash used in financing activities$ (2,624 ) $ (3,101 ) 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 was used by operating activities of$14,347 in the first quarter of 2021 as compared to cash provided by in the first quarter of 2020 of$4,034 . This decrease was primarily attributable to the change in net income of$19,043 in the first quarter of 2020 compared to a net loss of$8,773 for the same period in 2021 for a net decrease of$27,816 . Also contributing to the change in cash from operating activities in the first quarter of 2021, by comparison to the first quarter of 2020, was a net reduction in the cash adjustment from the change in fair value of equity securities of$7,805 and from higher cash outflows from inventory of$7,511 during the first quarter of 2021 compared to the first quarter of 2020. Partially offsetting these net cash outflows was a net change in the income tax receivable, demonstrating a cash outflow of$13,587 in the first quarter of 2020 as compared to a cash inflow of$774 , and a net change in accounts payable, including accounts payable-related parties, demonstrating a higher cash inflow of$10,539 in the first quarter of 2021 as compared to the first quarter of 2020. Investing Activities Cash from investing activities increased to$12,828 of cash provided by investing activities in the first three months of 2021 as compared to of$3,838 in the first three months of 2020. Of the$8,990 change,$9,560 was the result of an increase in net sales of marketable securities in the first three months of 2021 compared to the first three months of 2020. Such net sales totaled$13,080 , in the first three months of 2021, compared to$3,520 in net sales in the first three months of 2020. Financing Activities Cash used in financing activities was$2,624 and$3,101 , in the three months endedMarch 31, 2021 and 2020, respectively. The decrease of$477 was related to Debt origination costs in the three months endedMarch 31, 2020 from the amendment of our existing credit facility. The remaining$2,624 resulted from payments of dividends on our common stock in the first three months of 2021 and 2020. 23
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Credit Facility EffectiveMarch 30, 2020 , we entered into an amended and restated credit agreement with a syndicated group of commercial banks for$100,000 . The loan is a revolving facility, the proceeds of which may be used for our working capital, capital expenditures, and general corporate purposes. The facility terminates onMarch 30, 2025 . See Note 10 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 In the first three months of 2021 and 2020, 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$2,624 in each period. In the three months endedMarch 31, 2020 , we also declared a special cash dividend of$3.00 per share in the amount of$131,230 that was payable onApril 17, 2020 . 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 2021, 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, 2021 andDecember 31, 2020 , 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$50,173 and$64,404 atMarch 31, 2021 andDecember 31, 2020 , respectively.
Lastly, we maintain depositary accounts such as checking accounts, money market accounts, and other similar accounts at selected financial institutions.
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--------------------------------------------------------------------------------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, 2021 andDecember 31, 2020 . 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, 2021 orDecember 31, 2020 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. 25
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