FutureFuel Corp.
FutureFuel Corp. (Form: 10-Q, Received: 11/06/2014 16:20:19)

 

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, 2014

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)

 

(805) 565-9800

(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 6, 2014: 43,722,388

 

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The following sets forth our unaudited consolidated balance sheet as at September 30, 2014, our audited consolidated balance sheet as at December 31, 2013, our unaudited consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2014 and 2013, and our unaudited consolidated statements of cash flows for the nine-month periods ended September 30, 2014 and 2013.

 

FutureFuel Corp.

Consolidated Balance Sheets

As of September 30, 2014 and December 31, 2013

(Dollars in thousands)

 

   

(Unaudited)

September 30, 2014

   

December 31, 2013

 

Assets

               

Cash and cash equivalents

  $ 88,632     $ 86,463  

Accounts receivable, net of allowances of $46 and $0 at September 30, 2014 and December 31, 2013, respectively

    33,490       28,620  

Accounts receivable – related parties

    125       4,629  

Inventory

    59,184       42,164  

Income tax receivable

    11,196       14,732  

Prepaid expenses

    449       1,843  

Marketable securities

    106,246       104,271  

Other current assets

    5,649       566  

Total current assets

    304,971       283,288  

Property, plant and equipment, net

    128,375       128,671  

Other assets

    2,627       2,488  

Total noncurrent assets

    131,002       131,159  

Total Assets

  $ 435,973     $ 414,447  

Liabilities and Stockholders’ Equity

               

Accounts payable

  $ 20,356     $ 14,927  

Accounts payable – related parties

    8,917       857  

Current deferred income tax liability

    12,023       8,787  

Deferred revenue – short-term

    1,842       6,869  

Contingent liability – short-term

    1,151       1,151  

Accrued expenses and other current liabilities

    6,358       7,802  

Accrued expenses and other current liabilities – related parties

    99       3  

Total current liabilities

    50,746       40,396  

Deferred revenue – long-term

    15,820       13,522  

Other noncurrent liabilities

    2,709       2,690  

Noncurrent deferred income tax liability

    28,801       29,249  

Total noncurrent liabilities

    47,330       45,461  

Total liabilities

    98,076       85,857  

Commitments and contingencies

               

Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding

    -       -  

Common stock, $0.0001 par value, 75,000,000 shares authorized, 43,722,388 and 43,342,830 issued and outstanding as of September 30, 2014 and December 31, 2013, respectively

    4       4  

Accumulated other comprehensive income

    8,488       7,436  

Additional paid in capital

    277,192       276,328  

Retained earnings

    52,213       44,822  

Total stockholders’ equity

    337,897       328,590  

Total Liabilities and Stockholders’ Equity

  $ 435,973     $ 414,447  

 

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

 

 
2

 

 

FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

For the Three Months Ended September 30, 2014 and 2013

(Dollars in thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

September 30,

 
   

2014

   

2013

 

Revenues

  $ 93,418     $ 118,758  

Revenues – related parties

    9,717       2,361  

Cost of goods sold

    67,249       92,721  

Cost of goods sold – related parties

    14,124       1,238  

Distribution

    817       1,047  

Distribution – related parties

    73       95  

Gross profit

    20,872       26,018  

Selling, general, and administrative expenses

               

Compensation expense (inclusive of $776 and $0 of stock based compensation for the three months ended September 30, 2014 and September 30, 2013, respectively)

    1,425       864  

Other expense

    434       671  

Related party expense

    110       102  

Research and development expenses

    728       866  
      2,697       2,503  

Income from operations

    18,175       23,515  

Interest and dividend income

    1,432       1,370  

Interest expense

    (6

)

    (6

)

Loss on marketable securities

    -       (198

)

Other expense

    (16

)

    (38

)

      1,410       1,128  

Income before income taxes

    19,585       24,643  

Provision for income taxes

    8,134       9,346  

Net income

  $ 11,451     $ 15,297  
                 

Earnings per common share

               

Basic

  $ 0.26     $ 0.35  

Diluted

  $ 0.26     $ 0.35  

Weighted average shares outstanding

               

Basic

    43,361,123       43,339,000  

Diluted

    43,387,238       43,394,369  
                 

Comprehensive Income

               

Net income

  $ 11,451     $ 15,297  

Other comprehensive loss from unrealized net losses on available-for-sale securities, net of tax benefit of ($433) in 2014 and of ($60) in 2013

    (695

)

    (93

)

Comprehensive income

  $ 10,756     $ 15,204  

 

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

 

 
3

 

 

FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

For the Nine Months Ended September 30, 2014 and 2013

(Dollars in thousands, except per share amounts)

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2014

   

2013

 

Revenues

  $ 240,654     $ 313,560  

Revenues – related parties

    12,717       5,787  

Cost of goods sold

    195,228       227,510  

Cost of goods sold – related parties

    18,220       13,583  

Distribution

    2,608       2,905  

Distribution – related parties

    263       324  

Gross profit

    37,052       75,025  

Selling, general, and administrative expenses

               

Compensation expense (inclusive of $980 and $0 of stock based compensation for the nine months ended September 30, 2014 and September 30, 2013, respectively)

    3,034       2,805  

Other expense

    1,601       1,939  

Related party expense

    321       268  

Research and development expenses

    2,299       2,573  
      7,255       7,585  

Income from operations

    29,797       67,440  

Interest income

    5,369       4,212  

Interest expense

    (19

)

    (18

)

Gains on marketable securities

    2,900       1,891  

Other income/(expense)

    150       (72

)

      8,400       6,013  

Income before income taxes

    38,197       73,453  

Provision for income taxes

    15,125       25,950  

Net income

  $ 23,072     $ 47,503  
                 

Earnings per common share

               

Basic

  $ 0.53     $ 1.10  

Diluted

  $ 0.53     $ 1.10  

Weighted average shares outstanding

               

Basic

    43,352,552       43,202,022  

Diluted

    43,395,566       43,236,765  
                 

Comprehensive Income

               

Net income

  $ 23,072     $ 47,503  

Other comprehensive income from unrealized gains on available for sale securities, net of tax of $656 in 2014 and $2,150 in 2013

    1,052       3,450  

Comprehensive income

  $ 24,124     $ 50,953  

 

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

 

 
4

 

 

FutureFuel Corp.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2014 and 2013

(Dollars in thousands)

(Unaudited)

 

 

   

Nine Months Ended September 30,

 
   

2014

   

2013

 

Cash flows (used)/provided by operating activities

               

Net income

  $ 23,072     $ 47,503  

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

               

Depreciation

    6,722       8,050  

Provision/(benefit) for deferred income taxes

    2,132       (1,499

)

Change in fair value of derivative instruments

    1,923       715  

Other than temporary impairment of marketable securities

    -       336  

Impairment of fixed assets

    247       17,963  

Gain on the sale of investments

    (2,900

)

    (2,227

)

Losses on disposals of fixed assets

    15       87  

Stock based compensation

    980       -  

Noncash interest expense

    19       18  

Changes in operating assets and liabilities:

               

Accounts receivable

    (4,870

)

    (5,384

)

Accounts receivable – related parties

    4,504       (6,122

)

Inventory

    (17,020

)

    (5,700

)

Income tax receivable

    3,536       -  

Prepaid expenses

    1,608       1,253  

Accrued interest on marketable securities

    118       109  

Other assets

    (3,012

)

    (230

)

Accounts payable

    5,429       12,646  

Accounts payable – related parties

    8,060       (707

)

Income taxes payable

    -       514  

Accrued expenses and other current liabilities

    (1,444

)

    4,984  

Accrued expenses and other current liabilities – related parties

    96       155  

Deferred revenue

    (2,729

)

    (15,184

)

Net cash provided by operating activities

    26,486       57,280  

Cash flows from/(used in) investing activities

               

Collateralization of derivative instruments

    (4,465

)

    (1,572

)

Purchase of marketable securities

    (30,312

)

    (39,565

)

Proceeds from the sale of marketable securities

    32,945       30,907  

Proceeds from the sale of fixed assets

    3       55  

Capital expenditures

    (6,691

)

    (13,431

)

Net cash used in investing activities

    (8,520

)

    (23,606

)

Cash flows from/(used in) financing activities

               

Proceeds from the issuance of stock

    -       19,292  

Minimum tax withholding on stock options exercised and stock awards

    (175

)

    40  

Excess tax benefits associated with stock options and stock awards

    59       -  

Payment of dividends

    (15,681

)

    (14,301

)

Net cash (used in)/provided by financing activities

    (15,797

)

    5,031  
                 

Net change in cash and cash equivalents

    2,169       38,705  

Cash and cash equivalents at beginning of period

    86,463       58,737  

Cash and cash equivalents at end of period

  $ 88,632     $ 97,442  

Cash paid for income taxes

  $ 7,000     $ 26,900  

 

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

 

 
5

 

 

  Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

1)            Nature of operations and basis of presentation

 

Organization

 

FutureFuel Corp. (“FutureFuel ”), through its wholly-owned subsidiary, FutureFuel Chemical Company (“FutureFuel Chemical”), owns and operates a chemical production facility located on approximately 2,200 acres of land six miles southeast of Batesville in north central Arkansas fronting the White River (the “Batesville Plant”).  FutureFuel Chemical manufactures diversified specialty chemical products, biobased products comprised of biofuels, and biobased chemical products.  FutureFuel Chemical’s operations are reported in two segments: chemicals and biofuels.

 

The chemicals segment manufactures a diversified listing of chemical products that are sold to third party customers.  The majority of the revenues from the chemical segment are derived from the custom manufacturing of specialty chemicals for specific customers.  

 

The biofuels segment leverages the Batesville Plant’s technical and operational expertise as well as available manufacturing capacity to compete in the emerging biofuels industry.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared by FutureFuel in accordance and consistent with the accounting policies stated in FutureFuel’s 2013 audited consolidated financial statements and should be read in conjunction with the 2013 audited consolidated financial statements of FutureFuel.

 

In the opinion of FutureFuel, all normal recurring adjustments necessary for a fair presentation have been included in the unaudited consolidated financial statements.  The unaudited consolidated financial statements have been prepared in compliance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”).  Accordingly, the financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements, and do include amounts that are based upon management estimates and judgments.  Future actual results could differ from such current estimates.  The unaudited consolidated financial statements include assets, liabilities, revenues, and expenses of FutureFuel and its wholly owned subsidiaries, FutureFuel Chemical Company, FFC Grain, L.L.C., FutureFuel Warehouse Company, LLC, and Legacy Regional Transport, L.L.C.  Intercompany transactions and balances have been eliminated in consolidation.

 

2)             Inventory

 

The carrying values of inventory were as follows as of:

 

   

September 30,

2014

   

December 31,

2013

 

At average cost (approximates current cost)

               

Finished goods

  $ 24,263     $ 13,590  

Work in process

    1,676       1,569  

Raw materials and supplies

    43,242       36,292  
      69,181       51,451  

LIFO reserve

    (9,997

)

    (9,287

)

Total inventory

  $ 59,184     $ 42,164  

 

 
6

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

3)             Derivative instruments

 

FutureFuel is exposed to certain risks relating to its ongoing business operations.  Commodity price risk is the primary risk managed by using derivative instruments.  Regulated fixed price futures and option contracts are utilized to manage the price risk associated with future purchases of feedstock used in FutureFuel’s biodiesel production along with physical feedstock and finished product inventories attributed to this process.

 

FutureFuel recognizes all derivative instruments as either assets or liabilities at fair value in its consolidated balance 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 .  While management believes these instruments are entered into in order to effectively manage various risks, none of the derivative instruments are designated and accounted for as hedges primarily as a result of the extensive record keeping requirements.

 

The fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period.  Changes in fair value of the derivative instruments are recorded in the statement of operations as a component of cost of goods sold, and in addition to the realized gains/losses on settled derivative transactions, amounted to a gain of $5,239 and a loss of $1,947 for the three months ended September 30, 2014 and 2013, respectively, and a gain of $4,945 and $1,719 for the nine months ended September 30, 2014 and 2013, respectively.

 

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

 

   

Asset/(Liability)

 
   

September 30, 2014

   

December 31, 2013

 
   

Quantity

(Contracts) Long/

(Short)

   

Fair Value

   

Quantity

(Contracts) Long/

(Short)

   

Fair Value

 

Regulated options, included in other current assets

    (675

)

  $ (2,251

)

    (50

)

  $ (328

)

Regulated fixed price future commitments, included in other current assets

    -     $ -       4     $ -  

 

The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $4,944 and $479 at September 30, 2014 and December 31, 2013, respectively. The carrying values of the margin account and of the derivative instruments are included, net, in other current assets.

 

4)            Marketable securities

 

At September 30, 2014 and December 31, 2013, FutureFuel had investments in certain preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments primarily consisting of publicly traded partnerships and common stock.  These investments are classified as current assets in the consolidated balance sheet.  FutureFuel has designated these securities 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.  These securities were comprised of the following at:

 

   

September 30, 2014

 
   

Adjusted

Cost

   

Unrealized

Gains

   

Unrealized

Losses

   

Fair Value

 

Equity instruments

  $ 49,478     $ 12,116     $ (834

)

  $ 60,760  

Preferred stock

    21,100       1,237       (2

)

    22,335  

Trust preferred securities

    18,127       1,118       (3

)

    19,242  

Exchange traded debt instruments

    3,762       147       -       3,909  

Total

  $ 92,467     $ 14,618     $ (839

)

  $ 106,246  

 

 
7

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

   

December 31, 2013

 
   

Adjusted

Cost

   

Unrealized

Gains

   

Unrealized

Losses

   

Fair Value

 

Equity instruments

  $ 51,711     $ 11,597     $ (278

)

  $ 63,030  

Preferred stock

    18,519       893       (299

)

    19,113  

Trust preferred securities

    19,726       386       (235

)

    19,877  

Exchange traded debt instruments

    2,243       34       (26

)

    2,251  

Total

  $ 92,199     $ 12,910     $ (838

)

  $ 104,271  

 

The aggregate fair value of instruments with unrealized losses totaled $14,227 and $26,321 at September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014 and December 31, 2013, FutureFuel had a total of $0 and $0 invested in marketable securities that were in an unrealized loss position for a greater than 12-month period, respectively.

 

5)            Accrued expenses and other current liabilities

 

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

 

   

September 30,

2014

   

December 31,

2013

 

Accrued employee liabilities

  $ 4,897     $ 5,010  

Accrued property, use, and franchise taxes

    1,171       2,558  

Other

    389       237  

Total

  $ 6,457     $ 7,805  

 

6)             Borrowings

 

Effective June 30, 2013, FutureFuel Chemical extended the term of its $50 million credit agreement with a commercial bank.  The loan is a revolving facility, the proceeds of which may be used for working capital, capital expenditures, and the general corporate purposes of FutureFuel Chemical.  The facility terminates on June 30, 2018.  Advances are made pursuant to a borrowing base comprised of 85% of eligible accounts receivable plus 60% of eligible direct inventory plus 50% of eligible indirect inventory.  Advances are secured by a perfected first priority security interest in accounts receivable and inventory.  The interest rate floats at certain margins over the London Interbank Offered Rate (“LIBOR”) or a base rate based upon the leverage ratio from time to time as set forth in the following table.

 

Leverage

Ratio

 

Base Rate

Margin

 

LIBOR

Margin

> 3

 

-0.55%

 

1.70%

> 2 < 3

 

-0.70%

 

1.50%

> 1 < 2

 

-1.00%

 

1.25%

< 1

 

-1.00%

 

1.00%

 

There is an unused commitment fee of 0.25% per annum. On the last day of each fiscal quarter, the ratio of EBITDA to fixed charges may not be less than 3:1. FutureFuel has guaranteed FutureFuel Chemical’s obligations under this credit agreement.

 

There were no borrowings under this credit agreement at September 30, 2014 or December 31, 2013.

 

 
8

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

7)             Provision for income taxes

 

The following table summarizes the provision for income taxes.  

 

   

For the three months

ended September 30,

   

For the nine months

ended September 30,

 
    2014     2013     2014     2013  

Provisio n for income taxes

  $ 8,134     $ 9,346     $ 15,125     $ 25,950  

Effective tax rate

    41.5 %     37.9 %     39.6 %     35.3 %

 

The effective tax rate for the three and nine months ended September 30, 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 for 2014.

 

The effective tax rate for the three and nine months ended September 30, 2013 reflected FutureFuel’s expected tax rate on reported operating earnings before income tax and included the impact of the retroactive reinstatement of the 2012 agri-biodiesel producer tax credit, which was recognized in the three and nine months ended September 30, 2013 as a discrete item.  As a result of this treatment, FutureFuel’s effective tax rate for the three and nine months ended September 30, 2013 was abnormally low.

 

Unrecognized tax benefits totaled $1,718 and $1,718 at September 30, 2014 and December 31, 2013, respectively.

 

FutureFuel records interest and penalties net as a component of income tax expense.  At September 30, 2014 and December 31, 2013, respectively, FutureFuel recorded $0 and $0 in accruals for interest and tax penalties.

 

FutureFuel and its subsidiaries file tax returns in the U.S. federal jurisdiction and with various state jurisdictions.  FutureFuel is subject to U.S., state, and local examinations by tax authorities from 2010 forward.  FutureFuel Chemical is subject to the effects of tax examinations that may impact the carry-over basis of its assets and liabilities.

 

 
9

 

   

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

8)             Earnings per share

 

We compute earnings per share using the two-class method in accordance with Accounting Standards Codification Topic No. 260,” Earnings Per Share.” The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at September 30, 2014 or 2013.

 

Contingently issuable shares associated with outstanding service-based restricted stock units were not included in the earnings per share calculations for the three-month and nine-month periods ended September 30, 2014 as the vesting conditions had not been satisfied. No such restricted stock units existed in 2013.

 

   

For the three months ended September 30,

   

For the nine months ended September 30,

 

Numerator:

 

201 4

   

201 3

   

201 4

   

201 3

 

Net income

  $ 11,451     $ 15,297     $ 23,072     $ 47,503  

Less: distributed earnings allocated to nonvested restricted stock

    (42 )     -       (72 )     -  

Less: undistributed earnings allocated to nonvested restricted stock

    (50 )     -       (60 )     -  

Numerator for basic earnings per share

  $ 11,359     $ 15,297     $ 22,940     $ 47,503  

Effect of dilutive securities:

                               

Add: undistributed earnings allocated to nonvested restricted stock

    50       -       60       -  

Less: undistributed earnings allocated to nonvested restricted stock

    (50 )     -       (60 )     -  

Numerator for diluted earnings per share

  $ 11,359     $ 15,297     $ 22,940     $ 47,503  

Denominator:

                               

Weighted average shares outstanding - basic

    43,361,123       43,339,000       43,352,552       43,202,022  
Effect of dilutive securities:                                

Stock options and other awards

    26,115       55,369       43,014       34,743  

Weighted average shares outstanding – diluted

    43,387,238       43,394,369       43,395,566       43,236,765  
                                 

Basic earnings per share

  $ 0.26     $ 0.35     $ 0.53     $ 1.10  

Diluted earnings per share

  $ 0.26     $ 0.35     $ 0.53     $ 1.10  

 

No options to purchase shares of FutureFuel’s common stock were excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2014 or 2013.

 

 
10

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

9)            Segment information

 

FutureFuel has two reportable segments organized along product lines – chemicals and biofuels.

 

Chemicals

 

FutureFuel’s chemicals segment manufactures diversified chemical products that are sold externally to third party customers.  This segment comprises two components: “custom manufacturing” (manufacturing specialty chemicals for specific customers); and “performance chemicals” (multi-customer specialty chemicals).

 

Biofuels

 

FutureFuel’s biofuels business segment primarily manufactures and markets biodiesel.  Biodiesel revenues are generated through the sale of biodiesel to customers through FutureFuel’s distribution network at the Batesville Plant, through distribution facilities available at leased oil storage facilities, and through a network of remotely located tanks.  Results of the biofuels business segment also reflect the sale of biodiesel blends with petrodiesel, petrodiesel with no biodiesel added, RINs, biodiesel production byproducts and the purchase and sale of other petroleum products.

 

Summary of long-lived assets and revenues by geographic area

 

All of FutureFuel’s long-lived assets are located in the U.S.

 

Most of FutureFuel’s sales are transacted with title passing at the time of shipment from the Batesville Plant, although some sales are transacted based on title passing at the delivery point.  While many of FutureFuel’s chemicals are utilized to manufacture products that are shipped, further processed, and/or consumed throughout the world, the chemical products, with limited exceptions, generally leave the United States only after ownership has transferred from FutureFuel to the customer.  Rarely is FutureFuel the exporter of record, never is FutureFuel the importer of record into foreign countries, and FutureFuel is not always aware of the exact quantities of its products that are moved into foreign markets by its customers.  FutureFuel does track the addresses of its customers for invoicing purposes and uses this address to determine whether a particular sale is within or without the United States.  FutureFuel’s revenues attributable to the United States and foreign countries (based upon the billing addresses of its customers) were as follows:

 

Three Months Ended

 

United States

   

All Foreign

Countries

   

Total

 

September 30, 2014

  $ 100,925     $ 2,210     $ 103,135  

September 30, 2013

  $ 116,472     $ 4,647     $ 121,119  

 

Nine Months Ended

 

United States

   

All Foreign

Countries

   

Total

 

September 30, 2014

  $ 247,314     $ 6,057     $ 253,371  

September 30, 2013

  $ 307,351     $ 11,996     $ 319,347  

 

For the three months ended September 30, 2014 and 2013, revenues from Mexico accounted for 2% and 3%, respectively, of total revenues. For the nine months ended September 30, 2014 and 2013, revenues from Mexico accounted for 2% and 3%, respectively, of total revenues. Other than Mexico, revenues from a single foreign country during the three and nine months ended September 30, 2014 and 2013 did not exceed 1% of total revenues.

 

 
11

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Summary of business by segment

 

   

For the three months

ended September 30,

   

For the nine months

ended September 30,

 
   

2014

   

2013

   

2014

   

2013

 

Revenues

                               

Chemicals

  $ 44,939     $ 43,685     $ 107,824     $ 125,847  

Biofuels

    58,196       77,434       145,547       193,500  

Revenues

  $ 103,135     $ 121,119     $ 253,371     $ 319,347  
                                 

Segment gross profit

                               

Chemicals

  $ 17,824     $ 13,827     $ 33,989     $ 41,678  

Biofuels

    3,048       12,191       3,063       33,347  

Segment gross margins

    20,872       26,018       37,052       75,025  

Corporate expenses

    (2,697 )     (2,503 )     (7,255 )     (7,585 )

Income before interest and taxes

    18,175       23,515       29,797       67,440  

Interest and other income

    1,432       1,370       8,419       6,103  

Interest and other expense

    (22 )     (242 )     (19 )     (90 )

Provision for income taxes

    (8,134 )     (9,346 )     (15,125 )     (25,950 )

Net income

  $ 11,451     $ 15,297     $ 23,072     $ 47,503  

 

Depreciation is allocated to segment costs of goods sold based on plant usage. The total assets and capital expenditures of FutureFuel have not been allocated to individual segments, as large portions of these assets are shared to varying degrees by each segment, causing such an allocation to be of little value.

 

10)          Fair value measurements

 

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.  Fair value accounting pronouncements also include a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of FutureFuel.  Unobservable inputs are inputs that reflect FutureFuel’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances.  The hierarchy is broken down into three levels.  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.  Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs for the asset or liability.  Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.   

 

 
12

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The following tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis, at September 30, 2014 and December 31, 2013.

 

   

Asset/(Liability)

 
   

Fair Value at

September 30,

   

Fair Value Measurements Using

Inputs Considered as

 

Description

 

2014

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ (2,251

)

  $ (2,251

)

  $ -     $ -  

Preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments

  $ 106,246     $ 106,246     $ -     $ -  


 

   

Asset/(Liability)

 
   

Fair Value at

December 31,

   

Fair Value Measurements Using

Inputs Considered as

 

Description

 

2013

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ (328

)

  $ (328

)

  $ -     $ -  

Preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments

  $ 104,271     $ 104,271     $ -     $ -  

 

11)           Reclassifications from accumulated other comprehensive income:

 

The following tables summarizes changes in accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities.

 

Changes in Accumulated Other Comprehensive Income

Unrealized Gains and Losses on Available-for-Sale Securities

For The Three Months Ended September 30, 2014

(net of tax)  

Balance at June 30, 2014

  $ 9,183  

Other comprehensive loss before reclassifications

    (695

)

Amounts reclassified from accumulated other comprehensive income

    -  

Net current-period other comprehensive loss

    (695

)

Balance at September 30, 2014

  $ 8,488  

 

Changes in Accumulated Other Comprehensive Income

Unrealized Gains and Losses on Available-for-Sale Securities

For The Nine Months Ended September 30, 2014

(net of tax)  

Balance at December 31, 2013

  $ 7,436  

Other comprehensive income before reclassifications

    4,571  

Amounts reclassified from accumulated other comprehensive income

    (3,519

)

Net current-period other comprehensive gain

    1,052  

Balance at September 30, 2014

  $ 8,488  

 

 
13

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The following tables summarizes amounts reclassified from accumulated other comprehensive income in the three and nine months ended September 30, 2014:

 

 

Reclassifications from Accumulated Other Comprehensive Income

       

Three Months

Ended

September 30,

2014

   

Nine Months

Ended

September 30,

2014

 

Affected Line

Item in

Statement of

Operations

Unrealized gains on available-for-sale securities

  $ -     $ 5,713  

Gain on  marketable securities

Total before tax

    -       5,713    

Tax benefit

    -       (2,194 )  

Total reclassifications

  $ -     $ 3,519    

   

12)          Legal matters

 

From time to time, FutureFuel and its operations are parties to, or targets of, lawsuits, claims, investigations, regulatory matters, and proceedings, which are being handled and defended in the ordinary course of business.  While FutureFuel is unable to predict the outcomes of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.  However, adverse developments could negatively impact earnings or cash flows in a particular future period.

 

13)          Related party transactions

 

FutureFuel enters into transactions with companies affiliated with or controlled by a director and significant shareholder.  Revenues, expenses, prepaid amounts, and unpaid amounts related to these transactions are captured in the accompanying consolidated financial statements as related party line items.

 

Related party revenues are the result of sales of biodiesel, petrodiesel, blends, other petroleum products and other similar or related products to these related parties.

 

Related party cost of goods sold and distribution are the result of sales of biodiesel, petrodiesel, blends, and other petroleum products to these related parties along with the associated expense from the purchase of natural gas, storage and terminalling services, income tax, and consulting services by FutureFuel from these related parties.

 

14)          Asset impairment

 

On July 29, 2013, FutureFuel received a notice from the chemicals segment customer for the intermediate anode powder. The notice stated that, in accordance with the terms of the contract, the customer would terminate the contract effective August 9, 2014. As a result of this notice, FutureFuel assessed the carrying values of its fixed assets and deferred revenue associated with this product and recorded an impairment loss of $17,580 for the equipment based on the scrap value method less disposition costs and recorded a reduction of deferred revenue as an element of cost of goods sold in the amount of $16,160 in the three months ended September 30, 2013. The net impact of this impairment was $1,420 for the three months ended September 30, 2013 and was recorded in cost of goods sold. During the third quarter of 2014, FutureFuel received the final shortfall revenue payment and recognized the prior year shortfall payment as revenue for a total of $8,816. No material adjustments were necessary as a result of the final grant settlement with the Department of Energy

 

 
14

 

 

15)           Restricted Stock Compensation Awards

 

On May 9, 2014, a restricted stock compensation award for 250,000 shares was granted to Paul A. Novelly, our Chief Executive Officer, pursuant and subject to the terms and conditions of the Company’s 2007 Omnibus Incentive Plan. The restricted shares vest in three annual installments on the first, second, and third anniversaries of the grant date as service to the Company is fulfilled. The total expense for the award is $4,195 and will be recognized into expense equally over the three year service period.

 

On July 2, 2014 a restricted stock compensation award for 125,000 shares was granted to Paul Flynn, the new Executive Vice President of Business and Marketing for FutureFuel Chemical Company. Upon commencement of employment, 20% or 25,000 shares vested immediately. The remaining shares will vest equally over the next four years. The total expense for the award is $2,136.

 

For the three and nine months ended September 30, 2014, the total compensation expense related to both restricted stock awards was $776 and $980, respectively. No such awards existed in 2013.  

 

16)           Recently Issued Accounting Statements

 

In May 2014, the FASB and International Accounting Standards Board jointly issued new principles-based accounting guidance for revenue recognition that will supersede virtually all existing revenue guidance. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve the core principle, the guidance establishes the following five steps: 1) identify the contract(s) with a customer, 2) identify the performance obligation in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also details the accounting treatment for costs to obtain or fulfill a contract. Lastly, disclosure requirements have been enhanced to provide sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently evaluating the impact on the Company's financial position or results of operations and related disclosures.

 

 
15

 

 

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

 

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.

 

Results of Operations

 

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

 

Revenues

 

Total revenues for the three months ended September 30, 2014 decreased 15% to $103,135,000 as compared to revenues for the three months ended September 30, 2013 of $121,119,000. During the third quarter final shortfall revenue of $8,816,000 was recognized related to the production of the graphite anode material. The shortfall revenue recognized in the three months ended September 30, 2013 was $2,264,000. Excluding the impact of the shortfall revenue for both years, total revenue for the current three months ended decreased 21% as compared to the same quarter for the prior year.

 

Revenues from biofuels decreased 25% to $58,196,000, a decrease of $19,238,000 from the third quarter of 2013 and accounted for 56% of total revenues in the third quarter of 2014 as compared to 64% in the third quarter of 2013. We experienced both decreased biodiesel demand and reduced biodiesel selling prices in the third quarter of 2014 as compared to the third quarter of 2013. The biodiesel industry continues to suffer severely from the absence of both the 2014 final renewable fuel mandate from the federal government and the $1.00 per gallon federal blenders’ credit. The lack of the 2014 mandate has depressed the value of biodiesel RINs, which in turn has impacted biodiesel demand and revenue. For comparison, biodiesel RINs traded for just over $0.62 as of September 30, 2013, at which time the $1.00 per gallon federal blenders’ credit was in effect. RINs at September 30, 2014 traded for just over $0.50, and the $1.00 per gallon federal blenders’ credit has not been available in 2014. The change in biodiesel RIN value with the absence of the $1.00 per gallon federal blenders’ credit combined to have a significant impact on biodiesel profitability and, therefore, biodiesel demand. Unless or until these regulatory provisions change, we anticipate continued depressed conditions in the market for our biodiesel products.

 

A substantial portion of our biodiesel sold in the three months ended September 30, 2014 was to two major refiners in the United States. In the three months ended September 30, 2013 a substantial portion of our biodiesel sold was to a single major refiner in the United States. No assurances can be given that we will continue to sell to such major refiner(s) or, if we do sell, the volume that will be sold or the profit margin that will be realized. See “Risk Factors” contained in our Form 10-K for the year ended December 31, 2013 filed with the SEC on March 17, 2014.  A copy can also be obtained at our website at http://ir.futurefuelcorporation.com/sec.cfm . Biofuel revenues have benefited in the third quarter of 2014, from our sales of refined petroleum products as a supplier on a common carrier pipeline. Such gross sales totaled $10,990,000 and $0 in the three months ended September 30, 2014 and 2013, respectively.

 

Revenues from chemicals increased 3% during the most recent quarter compared to the third quarter of 2013, accounting for 44% of total revenues compared to 36% in the same quarter a year ago. Exclusive of shortfall revenues, chemical revenue decreased 13% as compared to the same quarter for the prior year. Within the chemicals segment, revenues for the three months ended September 30, 2014 changed as follows compared to the three months ended September 30, 2013: (i) revenues from our bleach activator decreased 21%; (ii) revenues from the two proprietary herbicides and associated intermediates increased 19% relative to the revenues recognized in the prior period from the original customer; (iii) revenues from other custom chemicals decreased 22% exclusive of shortfall revenue; and (iv) revenues from other performance chemicals increased 12%.

 

Revenue from the bleach activator and the two proprietary herbicide and associated intermediates are together the most significant components of our chemicals business revenue base, accounting for 18% of total revenues for the three months ended September 30, 2014 as compared to 17% of total revenues for the three months ended September 30, 2013. The future volume of and revenues from the bleach activator depend on both consumer demand for the product containing the bleach activator and the manufacturing, sales and marketing priorities of our customer. Revenues for the bleach activator decreased on reduced volumes in the three months ended September 30, 2014. Sales revenues and sales volume of the bleach activator have, generally, decreased over the last several years. We continue to work collaboratively with our customer to assess their future demand, which demand may continue to decline. We are currently working to develop new markets and product applications for proprietary bleach activator technology. No assurance can be given that success of additional bleach activator sales will be obtained.

 

Revenues from the two proprietary herbicide and associated intermediates increased for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The increased revenue was from a new herbicide intermediate we began selling to a new customer at the beginning of this year. We are transitioning the production capacity of our original herbicide customer to produce new herbicide intermediates for other customers.

 

 
16

 

 

 

Revenues from other custom chemical products decreased 22% in the third quarter of 2014, exclusive of shortfall revenue, as compared to the third quarter of 2013. This decrease resulted from discontinuation of two products. In addition, sales of one product were deferred to October due to a process disruption.

 

Performance chemicals revenue increased 12% in the third quarter of 2014 as compared to the same quarter last year, accounting for approximately 4% of total revenues for the three months ended September 30, 2014. Increased demand for two existing products and a product we added in the second quarter accounted for most of this increase.

 

Cost of Goods Sold, Distribution, and Segment Gross Profit

 

Total cost of goods sold and distribution for the third quarter of 2014 were $82,263,000 as compared to $95,101,000 for the third quarter of 2013, a decrease of 13%. By comparison, our revenues decreased 21% for the period, after excluding the benefit from shortfall revenue in both periods.

 

Cost of goods sold and distribution for the third quarter of 2014 in our biofuels segment were $55,148,000 as compared to $65,243,000 for the third quarter of 2013. On a percentage basis, cost of goods sold and distribution decreased 15% from the three months ended September 30, 2013 as compared to a 25% reduction in revenues for the same period. The reduction in biofuel segment gross profit was primarily the result of a combination of the following: (i) feedstock acquisition prices have not declined in proportion to the decline in biodiesel prices; (ii) the impact of not having the benefit of the $1.00 per gallon federal blender’s credit on quantities of biodiesel sold in the third quarter of 2014; (iii) reduced biodiesel RIN prices; and (iv) reduced production yields from the mix of feedstock purchased. Partially offsetting the reduced gross profit was the benefit of an increase in the hedging gain in the third quarter 2014 of $5,239,000 as compared to a loss of $1,947,000 in the third quarter of 2013. In addition, the biofuels segment benefited from a larger fixed cost allocation to the chemical segment for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 due to chemical revenues comprising a larger percentage of consolidated revenues.

 

Cost of goods sold and distribution for the three months ended September 30, 2014 for our chemicals segment totaled $27,115,000 as compared to $29,858,000 for the three months ended September 30, 2013.  On a percentage basis, total cost of goods sold and distribution decreased approximately 9% for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013.  This compares against a 13% decrease in chemical segment revenue for the same comparison periods exclusive of the shortfall revenue from the graphite anode material.  

 

The reduction in chemical segment gross profit was primarily the result of reduced sales volumes, particularly volumes of: (i) two other custom chemicals we no longer sell; (ii) reduced sales volumes of other custom chemicals, in part from production disruption; and (iii) the impact of a larger fixed cost allocation as previously noted. Chemical segment gross profit benefited from the absence of an asset impairment. In the third quarter of 2013, there was an impairment charge of $1,420,000 related to the graphite anode material and no such impairment charge existed in the third quarter of 2014.  

 

Operating Expenses

 

Operating expenses increased 8% from $2,503,000 in the third quarter of 2013 to $2,697,000 in the third quarter of 2014. This increase was primarily attributable to compensation expense from two restricted stock awards. A restricted stock award for 125,000 shares was granted on July 2, 2014 to Paul Flynn, FutureFuel Chemical Company’s new Vice President of Business & Marketing, pursuant and subject to the terms and conditions of the Company’s 2007 Omnibus Incentive Plan. Upon commencement of Mr. Flynn’s employment on September 2, 2014, 20% or 25,000 shares vested immediately. The remaining shares vest equally over the remaining annual installments on the first, second, third, and four anniversaries of the commencement of employment as service to the company is fulfilled. The total expense for the award was $2,136,000 and will be recognized as expense equally over the fourth year service period. The expense for the third quarter was $426,000. The second restricted stock award was issued on May 9, 2014 to Paul A. Novelly, our Chief Executive Officer, with an expense recognized in the third quarter for $350,000. This award vests annually with the expense recognized equally over the three year service period. No such stock awards existed in 2013. Partially offsetting this increase was reduced: (i) compensation expense from a smaller bonus accrual; (ii) legal expense; and (iii) research and development expense.

 

 
17

 

 

Provision for Income Taxes

 

The effective tax rate for the three months ended September 30, 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 for 2014. The effective tax rate for the three months ended September 30, 2013 reflected our expected tax rate on reported operating earnings before tax.

 

Set forth below is a summary of certain financial information regarding EBITDA for the three month periods indicated.

 

(Dollars in thousands other than per share amounts)

 

   

Three Months

Ended

September 30,

2014

   

Three Months

Ended

September 30,

2013

   

Dollar

Change

   

% Change

 

Revenues

  $ 103,135     $ 121,119     $ (17,984

)

    (14.8

) %

Income from operations

  $ 18,175     $ 23,515     $ (5,340

)

    (22.7

) %

Net income

  $ 11,451     $ 15,297     $ (3,846

)

    (25.1

) %

Earnings per common share - basic

  $ 0.26     $ 0.35     $ (0.09

)

    (25.7

) %

Earnings per common share – diluted

  $ 0.26     $ 0.35     $ (0.09

)

    (25.7

) %

Capital expenditures (net of reimbursements)

  $ 671     $ 7,570     $ (6,899

)

    (91.1

) %

Adjusted EBITDA

  $ 15,902     $ 28,177     $ (12,275

)

    (43.6

) %

 

We use adjusted EBITDA, a non-GAAP financial measure, as an operating metric to measure both performance and liquidity. 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, other non-operating income or expenses, and, in 2013, the impact from the retroactive reinstatement of the 2012 $1.00 biodiesel blenders tax credit. 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.

 

The following table reconciles adjusted EBITDA with net income, the most directly comparable GAAP performance financial measure.

 

(Dollars in thousands)

 

 

Three Months Ended

September 30, 2014

 

Three Months Ended

September 30, 2013

 

Adjusted EBITDA

$ 15,902   $ 28,177  

Depreciation

  (2,195 )   (2,666

)

Non-cash stock based compensation

  (776 )   -  

Interest and dividend income

  1,432     1,370  

Interest expense

  (6 )   (6

)

Loss on disposal of property and equipment

  (11 )   (87

)

Gains/(losses) on derivative instruments

  5,239     (1,947

)

Other expense, net

  -     (198

)

Income tax expense

  (8,134 )   (9,346

)

Net income

$ 11,451   $ 15,297  

 

 
18

 

 

A table reconciling adjusted EBITDA with cash flows from operations, the most directly comparable GAAP liquidity measure, is set forth below under Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013 .

 

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

 

Revenues

 

Revenues for the nine months ended September 30, 2014 decreased 21% to $253,371,000 as compared to $319,347,000 in revenues for the nine months ended September 30, 2013. Revenues from biofuels for the nine months just ended decreased 25% and accounted for 57% of total revenues in the first nine months of 2014, as compared to 61% in the prior year period. Revenues from chemicals decreased from $125,847,000 to $107,824,000 and accounted for 43% of total revenues in the first nine months of 2014. Exclusive of the shortfall revenue, chemical revenues declined 20%.

 

Revenues from biofuels decreased from $193,500,000 in the nine months ended September 30, 2013 to $145,547,000 in the nine months ended September 30, 2014. The expiration of the $1.00 per gallon federal blender’s credit on December 31, 2013 along with the absence of the government mandated renewable fuel standard for biodiesel for 2014 combined to negatively impact the biodiesel industry and our biodiesel segment. Additionally, our results for the first nine months of 2013 included a positive impact from the retroactive reinstatement of the 2012 $1.00 per gallon federal blender’s credit. A substantial portion of our biodiesel sold in the first nine months of 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 that will be sold or the profit margin that will be realized. Revenues from biofuels also include our gross sales of refined petroleum products as a supplier on a common carrier pipeline. Such gross sales totaled $10,990,000 in the first nine months of 2014, compared to $9,213,000 in the first nine months of 2013. 

 

Within the chemicals segment, revenues for the first nine months of 2014 changed as follows compared to the first nine months of 2013: (i) revenues from the bleach activator decreased 21%; (ii) revenues from the proprietary herbicide and intermediates decreased 31%; (iii) revenue from other custom chemicals decreased 24% exclusive of shortfall revenue; and (iv) revenues from performance chemical products increased 24%.

 

Revenue from the bleach activator and the proprietary herbicide and intermediates are together the most significant components of our chemicals business revenue base, accounting for 18% of total revenues for the nine months ended September 30, 2014 and September 30, 2013. Revenues from the bleach activator decreased 21% during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decrease was attributable to reduced volumes sold in 2014. The future volume of and revenues from the bleach activator depend on both consumer demand for the product containing the bleach activator and the manufacturing, sales, and marketing priorities of our customer. We continue to work collaboratively with our customer to assess their future demand, which demand may continue to decline. We are currently working to develop new markets and product applications for proprietary bleach activator technology. No assurance can be given that success of additional bleach activator sales will be obtained.

 

With respect to the proprietary herbicide and intermediates, the 31% decrease in revenue for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 was attributable to reduced volumes of the original herbicide partially offset by transitioning of assets to produce the new herbicide intermediate in 2014.

 

Revenues from other custom chemical products decreased 24% in the first nine months of 2014, exclusive of shortfall revenue, as compared to the first nine months of 2013. The decrease was largely the result of discontinuation of two chemical products and changes in unit pricing. In addition, sales of one product were deferred to October due to a production disruption.

 

Revenues from proprietary chemicals increased 24% for the first nine months of 2014 as compared to the first nine months of 2013 and accounted for approximately 5% of total revenues for the first nine months of 2014. The increase was due to a new product we added in the second quarter and increased demand of an existing product.

 

Cost of Goods Sold, Distribution, and Segment Gross Profit

 

Total cost of goods sold and distribution for the first nine months of 2014 were $216,319,000 as compared to $244,322,000 for the first nine months of 2013, a decrease of 11%, which compares to a 23% decrease in revenues for the period exclusive of shortfall revenue for both periods related to the graphite anode material.

     

 
19

 

 

Cost of goods sold and distribution for the first nine months of 2014 in our biofuels segment was $142,484,000 as compared to $160,153,000 for the first nine months of 2013. On a percentage basis, cost of goods sold and distribution decreased 11% versus a decrease in revenues of 25%. This reduction in biofuel segment gross profit was largely the result of a combination of the following: (i) expiration of the $1.00 per gallon federal blenders’ credit on December 31, 2013; (ii) the first nine months of 2013 including the benefit of the retroactive reinstatement of the 2012 $1.00 per gallon federal blenders’ credit of $2,535,000; and (iii) feedstock prices have not declined in proportion to the decline in biodiesel prices. Partially offsetting the reduced gross profit was the benefit of an increase in the hedging gain in the first nine months of 2014 of $4,945,000 as compared to $1,719,000 in the first nine months of 2013. In addition, the biofuels segment benefited from a larger fixed cost allocation to the chemical segment for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 due to chemical revenues comprising a larger percentage of consolidated revenues. 

 

Cost of goods sold and distribution for the first nine months of 2014 for our chemicals segment totaled $73,835,000 as compared to $84,169,000 for the first nine months of 2013. On a percentage basis, cost of goods sold and distribution decreased 12% versus a decrease of 20% in revenues exclusive of the final shortfall revenue from the graphite anode material. The reduction in chemical segment gross profit was largely the result of reduced sales volumes, particularly volumes of: (i) two other custom chemicals we no longer sell; (ii) the bleach activator; (iii) the original proprietary herbicide intermediate; (iv) deferred sales due to a production disruption; and (v) the impact of a larger fixed cost allocation as previously noted. Chemical segment gross profit benefited from the absence of an asset impairment. In the first nine months of 2013, there was an impairment charge related to the graphite anode material of $1,420,000 and no such impairment charge existed in the first nine months of 2014.

 

 

Operating Expenses  

 

Operating expense decreased 4%, from $7,585,000 in the nine months ended September 30, 2013 to $7,255,000 in the nine months ended September 30, 2014. The majority of the decrease was attributed to reduced compensation expense which was partially offset by two restricted stock awards. One issuance was for 250,000 shares of restricted stock on May 9, 2014 to Paul A. Novelly, our Chief Executive Officer pursuant and subject to the terms and conditions of the Company’s 2007 Omnibus Incentive Plan. The restricted shares vest in three annual installments on the first, second, and third anniversaries of the grant date as service to the company is fulfilled. The total expense for the award to Mr. Novelly is $4,195,000 and will be recognized into expense equally over the three year service period. The other issuance was for 125,000 shares of stock on July 2, 2014 to Paul Flynn, FutureFuel Chemical Company’s new Executive Vice President of Business and Marketing. Upon commencement of employment, 20% or 25,000 shares vested immediately. The remainder will vest equally over the next four years. The total expense for the award is $2,136,000, $426,000 of which was recognized immediately and the remainder will be recognized equally over the next four years. For the nine months ended September 30, 2014, the total compensation expense related to both restricted stock awards was $980,000. No such awards existed in 2013.

 

Provision for Income Taxes

 

The effective tax rates for the nine months ended September 30, 2014 and 2013 reflect our expected tax rate on reported operating earnings before income taxes. The effective tax rate for the nine months ended September 30, 2013 includes the full anticipated impact of the retroactive reinstatement of the 2012 agri-biodiesel production tax credit, which was recognized in the first quarter of 2013 as a discrete item. As a result of this treatment, our effective tax rate for the nine months ended September 30, 2013 is lower than it otherwise would be.

 

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 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 five specialty chemical products in the first three months of 2014 and 2013 relate to revenue that was recognized in accordance with contractual agreements based on product 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 chemical customers.  Sales revenue under bill and hold arrangements were $32,029,000 and $38,079,000 for the nine months ended September 30, 2014 and 2013, respectively.

   

 
20

 

 

Set forth below is a summary of certain financial information regarding EBITDA for the nine month periods indicated.

 

(Dollars in thousands other than per share amounts)

 

   

Nine Months

Ended

September 30,

2014

   

Nine Months

Ended

September 30,

2013

   

Dollar

Change

   

% Change

 

Revenues

  $ 253,371     $ 319,347     $ (65,976 )     (20.6 %)

Income from operations

  $ 29,797     $ 67,440     $ (37,643 )     (55.8 %)

Net income

  $ 23,072     $ 47,503     $ (24,431 )     (51.4 %)

Earnings per common share - basic

  $ 0.53     $ 1.10     $ (0.57 )     (51.8 %)

Earnings per common share – diluted

  $ 0.53     $ 1.10     $ (0.57 )     (51.8 %)

Capital expenditures (net of customer reimbursements and grants)

  $ 5,790     $ 11,179     $ (5,389 )     (48.2 %)

Adjusted EBITDA

  $ 32,719     $ 71,251     $ (38,532 )     (54.1 %)

 

See the discussion above regarding our use of adjusted EBITDA. The following table reconciles adjusted EBITDA with net income, the most directly comparable GAAP financial measure.

 

   

Nine Months

Ended

September 30,

2014

   

Nine Months

Ended

September 30,

2013

 

Adjusted EBITDA

  $ 32,719     $ 71,251  

Depreciation and amortization

    (6,722 )     (8,050 )

Non-cash stock-based compensation

    (980 )     -  

Retroactive reinstatement of 2012 $1 blender credit

    -       2,535  

Interest and dividend income

    5,369       4,212  

Interest expense

    (19 )     (18 )

Loss on disposal of property and equipment

    (15 )     (87 )

Gains on derivative instruments

    4,945       1,719  

Other income, net

    2,900       1,891  

Income tax expense

    (15,125 )     (25,950 )

Net income

  $ 23,072     $ 47,503  

 

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

 

Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities

 

   

Nine Months

Ended

September 30,

2014

   

Nine Months

Ended

September 30,

2013

 

Adjusted EBITDA

  $ 32,719     $ 71,251  

Provision for/(benefit from) deferred income taxes

    2,132       (1,499 )

Impairment of fixed assets

    247       17,963  

Retroactive reinstatement of 2012 $1.00 blenders credit

    -       2,535  

Interest and dividend income

    5,369       4,212  

Income tax expense

    (15,125 )     (25,950 )

Gains on derivative instruments

    4,945       1,719  

Change in fair value of derivative instruments

    1,923       715  

Changes in operating assets and liabilities, net

    (5,724 )     (13,666 )

Net cash provided by operating activities

  $ 26,486     $ 57,280  

 

 
21

 

   

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, 2014 and 2013 are set forth in the following chart.

 

(Dollars in thousands)

 

   

September 30,

2014

   

September 30,

2013

 

Net cash provided by operating activities

  $ 26,486     $ 57,280  

Net cash provided by/(used) in investing activities

  $ (8,520

)

  $ (23,606

)

Net cash (used in)/provided by financing activities

  $ (15,797

)

  $ 5,031  

 

Operating Activities

 

Cash provided from operating activities decreased from $57,280,000 of cash provided by operating activities in the first nine months of 2013 to $26,486,000 of cash provided by operating activities in the first nine months of 2014. This decrease was primarily attributable to a decrease in net income, an increase in inventory, and a decrease in accrued expense and other current liabilities. Partially increasing cash provided from operating activites was a smaller decrease in accounts receivable balances for the first nine months of 2014 as compared to the decrease in the first nine months of 2013. In the first nine months of 2013, changes in inventory carrying values decreased cash provided from operating activities by $5,700,000. In the first nine months of 2014, changes in inventory carrying values decreased cash from operating activities by $17,020,000. The increase in the inventory carrying value in the first nine months of 2014 was primarily due to an increase in biodiesel inventory and from the timing and amount of purchases made on a common carrier pipeline. Also decreasing cash provided from operating activities was the change in accrued expenses, including accrued expenses from related parties. In the first nine months of 2013, the change in accrued expenses increased cash from operating activities by $5,139,000. In the first nine months of 2014, accrued expenses reduced cash by $1,348,000. This reduction in accrued expenses in the first nine months of 2014 was primarily due to the timing and amount of payments to vendors and suppliers. Net income in the first nine months of 2013 totaled $47,503,000, while in the first nine months of 2014 net income totaled $23,072,000. Partially offsetting these decreases to cash from operating activities was the change in accounts receivable. In the first nine months of 2014, accounts receivable, including accounts receivable from related parties, decreased cash provided by operating activities by $366,000. In the first nine months of 2013, accounts receivable, including accounts receivable from related parties, decreased cash from operating activities by $11,506,000. This smaller use of cash in accounts receivable in 2014 was primarily related to the timing of shipments and payments from customers on the common carrier pipeline. Also increasing cash was a larger increase in accounts payable, including accounts payable to related parties. In the first nine months of 2013, changes in accounts payable, including accounts payable to related parties, increased cash from operating activities by $11,939,000. In the first nine months of 2014, changes in accounts payable, including accounts payable to related parties, increased cash from operating activities by $13,489,000. This larger increase was primarily due to the timing and amount of payments to vendors and suppliers.

 

Investing Activities

 

Cash used in investing activities decreased from $23,606,000 in the first nine months of 2013 to cash used of $8,520,000 in the first nine months of 2014. This smaller use of cash was primarily from proceeds from net sales of marketable securities in the first nine months of 2014 of $2,633,000 as compared to the first nine months of 2013 with net purchases of $8,658,000. Our capital expenditures and customer reimbursements for capital expenditures also used less cash as summarized in the following table:

 

 (Dollars in thousands)

 

   

Nine Months

Ended

September 30,

2014

   

Nine Months

Ended

September 30,

2013

 

Cash paid for capital expenditures

  $ 6,691     $ 13,431  

Cash received as reimbursement of capital expenditures

    (901

)

    (2,252

)

Cash paid, net of reimbursement, for capital expenditures

  $ 5,790     $ 11,179  

 

 
22

 

   

Financing Activities

 

Cash from/used in financing activities changed from $5,031,000 of cash provided by financing activities for the first nine months of 2013 to $15,797,000 of cash used by financing activities in the first nine months of 2014. This change is primarily the result of a decrease in proceeds from the issuance of stock. In the first nine months of 2013, 1,594,872 shares of FutureFuel’s common stock were sold under its at-the-market offering, generating $19,292,000 in net proceeds which completed the at-the-market offering. No new offering existed in the first nine months of 2014.

 

Credit Facility

 

We renewed a $50 million credit agreement with a commercial bank effective June 30, 2013. 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 June 30, 2018. Advances are made pursuant to a borrowing base. Advances are secured by a perfected first priority security interest in our accounts receivable and inventory. The interest rate floats at certain margins over LIBOR or base rate based upon the leverage ratio from time to time. There is an unused commitment fee. The ratio of total funded debt to EBITDA may not be more than 3:1. We had no borrowings under this credit agreement at September 30, 2014 or December 31, 2013.

 

We intend to fund future capital requirements for our businesses from cash flow generated by us 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 2014, we paid a regular cash dividend in the amount of $0.12 per share on our common stock.  The regular cash dividend amounted to $5,201,000 in the first quarter of 2014, $5,233,000 in the second quarter of 2014, and $5,247,000 in the third quarter of 2014, for aggregate dividend payments of $15,681,000 in the first nine months of 2014.

 

In the first three quarters of 2013, we paid a regular cash dividend in the amount of $0.11 per share on our common stock.  The regular cash dividend amounted to $4,767,000 in each of the first three quarters of 2013, for aggregate dividend payments of $14,301,000 in the first nine months of 2013.

 

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 are being paid in 2014, 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, 2014 and December 31, 2013, 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 the preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments totaled $106,246,000 and $104,271,000 at September 30, 2014 and December 31, 2013, 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 on our balance sheet at September 30, 2014 and December 31, 2013.  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, 2014 or December 31, 2013 as 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 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 chemical and biofuels business both with respect to input (electricity, coal, raw materials, biofuels feedstock, etc.) and output (manufactured chemicals and biofuels).

 

We seek to mitigate our market risks associated with the manufacturing and sale of chemicals by entering into longterm sales 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. Because such price protections are not always obtained, however, 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 three months of 2014 or 2013.  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.

 

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, 2014 and December 31, 2013, the fair values of our derivative instruments were a net liability in the amount of $2,251,000 and $328,000, 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.

 

 
24

 

 

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 2014.  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 (a) Requirements

 

Units

 

Hypothetical

Adverse Change in Price

   

Decrease in

Gross Profit

   

Percentage

Decrease in

Gross Profit

 

Crude corn oil and yellow grease

    206,614  

LB

    10 %   $ 6,860       18.5 %

Petrofuels

    18,212  

GAL

    10 %   $ 5,469       14.8 %

Methanol

    90,540  

LB

    10 %   $ 2,119       5.7 %

Natural Gas

    927  

MCF

    10 %   $ 490       1.3 %

Electricity

    77  

MWH

    10 %   $ 419       1.1 %

 

(a)

Volume requirements and average price information are based upon volumes used and prices obtained for the nine months ended September 30, 2014.  Volume requirements may differ materially from these   quantities in future years as our business. 

 

We had no borrowings as of September 30, 2014 or December 31, 2013 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.

   

 
25

 

 

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 (or 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, 2014 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, 2013 filed with the SEC on March 17, 2014.

 

Item 2:   Unregistered Sales of Equity Securities & 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

10.19.1 Employment Agreement dated July 2, 2014 between FutureFuel Chemical Company and Paul M. Flynn
10.19.2 Amendment to Employment Agreement dated July 2, 2014 between FutureFuel Chemical Company and Paul M. Flynn

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, a 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.

   

 
26

 

 

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” 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.

 

 
27

 

 

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 6, 2014

 

 

 

 

By:

/s/ Rose M. Sparks    

 

Rose M. Sparks, Chief Financial Officer and Principal

Financial Officer

 

Date:  November 6, 2014

 

 

 

 

27

Exhibit 10.19.1

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement ( “Agreement” ) is made and entered into as of this 2 nd day of July, 2014, by and between FutureFuel Chemical Company, a Delaware corporation ( “Company” ) and Paul M. Flynn, an individual resident of Missouri ( “Flynn” ), with Company and Flynn referred to collectively herein as the “Parties” and individually as a “Party” .

 

Recitals

 

A.     Company is a manufacturer of premium biofuels and custom and specialty organic chemicals from its facility in Batesville, Arkansas. Company has its corporate headquarters in Clayton, Missouri.

 

B.     Flynn is a global business executive with 25 years of international experience in over 30 countries in the chemistry and biotech industry. The Parties acknowledge that Flynn is foregoing lucrative current employment and potential career advancement with his current employer in order to take a position with Company and the compensatory provisions of this Agreement are designed in part to recognize such circumstances.

   

C.     The Parties have agreed that Company shall employ Flynn as its Executive Vice President of Business and Marketing, responsible for leading business operations and marketing for Company, all on the terms and conditions set forth herein.

 

Agreement

 

The premises having been considered and with acknowledgment of the mutual promises and of other good and valuable consideration herein contained, the Parties, intending to be legally bound, hereby agree as follows:

 

1.      Duties of Employment. Flynn shall perform his duties as Executive Vice President of Business and Marketing of Company, reporting directly to Company’s chief executive officer, currently Paul A. Novelly. Flynn will devote his entire business time and attention to this position with Company and will perform such duties as may be required of him. Flynn shall not, without the prior written consent of Company, directly or indirectly, render services of a business or professional nature to any other person or firm during the term of this Agreement.

       

2.      Term of Employment. Company shall employ Flynn as its Executive Vice President of Business and Marketing commencing on August 1, 2014 through July 31, 2015 (the “Initial Term” ). This Agreement may not be terminated during the Initial Term except for Flynn’s death or disability (as defined below); discharge of Flynn by Company for Cause (as defined below); Flynn’s resignation for Good Reason (as defined below) or the consummation of a transaction resulting in a Change of Control (as defined below). Following the Initial Term, this Agreement automatically renews itself for successive one year periods (each a “ Renewal Term ”) unless either Party notifies the other in writing at least 90 days prior to expiration of the Initial Term or the then current Renewal Term, as applicable, of its intent to terminate this Agreement, in which event this Agreement terminates at the end of the Initial Term or such Renewal Term, as applicable.

     

 
 

 

 

3.      Compensation .  

 

3.1.      Base Salary. For all services rendered by Flynn while employed under this Agreement, Flynn shall be paid a base salary of $208,000 per year ( “Base Salary” ), annualized, effective August 1, 2014, and paid pursuant to Company’s payroll schedule for salaried employees. Flynn’s Base Salary shall be reviewed by Company on an annual basis for possible increases per the normal course of Company’s business. Company reviews management compensation on an annual basis near the end of each calendar year. Accordingly, the first annual review of Flynn’s Base Salary shall occur during 2015. Any increase in Flynn’s Base Salary shall not serve to limit or reduce any other financial obligation of Company to Flynn under this Agreement. Flynn’s Base Salary shall not be materially reduced after any such increase, except as otherwise permitted under Section 5.7(ii) below.

 

3.2.      Annual Cash Bonus. In addition to Base Salary, Company shall pay Flynn an annual cash bonus ( “Annual Cash Bonus” ), which for 2014 will be a minimum of $92,000.00 (Ninety Two Thousand Dollars) prorated over the number of months employed in calendar year 2014. Payment of any Annual Cash Bonus shall be made by no later than the end of the first quarter of the year following the year in which such Annual Cash Bonus accrued. After the Initial Term, Flynn shall be paid an Annual Cash Bonus in the minimum amount of $92,000, with any amount in excess thereof to be determined by Company in the normal course of its business. In the event of Flynn’s death or disability (each as defined herein) during the term of this Agreement, Flynn’s Annual Cash Bonus for the year of his death or disability shall be deemed earned monthly on a prorated basis through the date of his death or disability and such prorated amount shall be paid to Flynn, his estate or legal representative within 30 days following the date of death or disability.

 

3.3.      Equity Compensation. Upon final execution of this Agreement by the Parties, Company shall make an immediate grant to Flynn of 125,000 shares of FutureFuel Corp. common stock (the “Restricted Shares” ). The grant of Restricted Shares is long term incentive compensation to Flynn, with the following vesting schedule to apply:

 

3.3.1.      Upon Flynn’s commencement of employment on August 1, 2014, he will be vested on that day with 25,000 Restricted Shares;

3.3.2.      If this Agreement has not earlier terminated, then upon Flynn’s one year anniversary of employment with Company, he will vest in another 25,000 Restricted Shares;

3.3.3.      If this Agreement has not earlier terminated, then upon Flynn’s second anniversary of employment with Company, he will vest in another 25,000 Restricted Shares;    

3.3.4.      If this Agreement has not earlier terminated, then upon Flynn’s three year anniversary of employment with Company, he will vest in another 25,000 Restricted Shares; and

 

 
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3.3.5.      If this Agreement has not earlier terminated, then upon Flynn’s four year anniversary of employment with Company, he will vest in the final 25,000 Restricted Shares;

 

provided further, however, that (i) all 125,000 Restricted Shares shall be eligible for voting and dividend payments prior to vesting, and (ii) upon Flynn’s death or disability during the term of this Agreement, all 125,000 Restricted Shares shall vest automatically.

 

3.4.      401(k) Plan. During the term of this Agreement, Flynn shall be eligible to participate in Company’s 401(k) defined contribution plan (the “401(k) Plan” ) on the same terms and conditions applicable to all full-time employees of Company. The 401(k) Plan currently requires 1,000 Hours of Service, as that term is defined in the 401(k) Plan, to the Company prior to the employee being eligible to participate and provides that Company will match 100% of the employee’s elective deferrals up to 6% of the employee’s eligible compensation, subject in all cases to IRS limitations and regulations. Because Flynn is not immediately eligible to participate in the 401(k) Plan, Company, at its own discretion, may increase Flynn’s Annual Cash Bonus as consideration for such circumstance.

   

4.      Work Location. Flynn’s primary office location shall be in Clayton, Missouri. Flynn shall spend approximately 50% of his time in target travel to Batesville, AR, as well as to customer locations and industry-related trade shows and events. Company shall reimburse Flynn for all reasonably incurred travel and accommodation expenses to Batesville, AR and other locations necessitated by the carrying out of his duties as Executive Vice President of Business and Marketing. In addition, Flynn shall be provided regular access to a corporate aircraft provided by Company at its expense for Flynn’s travel to Batesville, in each case upon prior approval by Company’s Chief Executive Officer. Flynn’s employment with Company shall not be contingent at any time on any requirement that he relocate to Batesville, AR.

     

5.      Termination and Change of Control.

   

5.1.      Termination for Cause . Company may terminate this Agreement, in its sole discretion, at any time “for cause,” the grounds for which are defined in Section 5.2 below. In the case of termination for cause, Company shall have no obligation to Flynn for salary, bonus, or other compensation or any other form of benefits under this Agreement except for: (i) Base Salary earned prior to the effective date of termination, (ii) vested benefits Flynn has accrued under the 401(k) Plan or other ERISA plans provided by Company to all its employees, or (iii) other benefits mandated under state or federal law for terminated employees (such as COBRA health benefits). In the case of termination for cause, Company shall reimburse Flynn for all appropriately documented expenses incurred by Flynn prior to the termination date that are otherwise reimbursable to Flynn under this Agreement or Company policy. Upon any termination for cause, any unvested Restricted Shares shall lapse and Flynn shall have no further rights or privileges with respect thereto.

   

 
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5.2.      Definition of Cause. “Cause” means (i) the willful and intentional failure of Flynn to perform substantially his duties with Company (other than such failure resulting from incapacity due to physical or mental illness or following Flynn’s delivery of a Notice of Termination for Good Reason) after a written demand for substantial performance is delivered to Flynn by Company’s Chief Executive Officer or Board of Directors that specifically identifies the manner in which Company believes Flynn has so willfully or intentionally failed to perform, (ii) having willfully committed fraud or otherwise acting in a willful and intentional manner to harm the Company, (iii) committing a felony crime, (iv) engaging in gross misconduct that is materially and demonstrably injurious to Company, or (v) willful violation by Flynn of the provisions of Section 8 below.

   

5.3.      Definition of Willful. For purposes of this Agreement, no act, or failure to act, on the part of Flynn shall be considered “willful” unless it is done, or omitted to be done, by him in intentional bad faith or without reasonable belief that his conduct was in the best interests of Company.

 

5.4.      Automatic Termination for Death or Disability; Payments on Death. Flynn’s employment with Company and this Agreement shall terminate automatically upon Flynn’s death or “disability” (as defined immediately below). Upon Flynn’s death, the following payments shall be made by Company to Flynn’s estate or legal representative, payable within thirty (30) days after the date of death: (i) accrued but unpaid Base Salary through the date of death, (ii) Flynn’s accrued unpaid vacation pay through the date of death in accordance with standard Company policy, and (iii) Annual Cash Bonus payable pursuant to Section 3.2 above. Additionally, Company promptly shall cause any remaining unvested Restricted Shares under Section 3.3 above to be tendered to Flynn’s estate or personal representative.

 

5.5.      Definition of Disability. “Disability” means Flynn’s permanent inability to perform the essential functions of his job because of mental or physical impairment, illness or injury for a period in excess of (i) ninety (90) consecutive days, or (ii) one hundred eighty (180) non-consecutive days in any twelve (12) month period, confirmed by the written statement of a licensed and practicing physician in the State of Missouri, or Flynn’s condition entitles him to permanent disability benefits under any long term disability insurance or benefit plan provided by Company; subject in each case, however, to any obligation of the Company to provide reasonable accommodation to Flynn as a result of such disability pursuant to the Americans with Disabilities Act (ADA) or any similar state statute.

   

5.6.      Payments upon Disability. Upon Flynn’s disability, the following payments shall be made by Company to Flynn or Flynn’s legal representative, as applicable, payable within thirty (30) days after the date of disability: (i) accrued but unpaid Base Salary through the date of disability, (ii) Flynn’s accrued unpaid vacation pay through the date of disability, if any, and (iii) Annual Cash Bonus payable pursuant to Section 3.2 above. Additionally, Company promptly shall cause any remaining unvested Restricted Shares under Section 3.3 above to be tendered to Flynn or his legal representative, as applicable.

   

 
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5.7.      Definition of Good Reason. “Good Reason” means Flynn’s resignation of employment with Company as a result of one or more of the following reasons: (i) the assignment to Flynn of duties materially inconsistent with Flynn’s position as Executive Vice President of Business and Marketing, or materially inconsistent with applicable laws, or which constitute a material diminution in Flynn’s position, authority, responsibilities or duties; (ii) Company materially reduces Flynn’s Base Salary or the benefits provided by Company and/or its subsidiaries to Flynn, other than any such reduction that affects, or that is similar to a change in benefits that affects, all other similarly situated executives of Company; or (iii) a material breach by Company of its obligations under this Agreement.

 

5.8.      Notice of Termination for Good Reason. There can be no resignation by Flynn for Good Reason unless Flynn promptly delivers to Company written notice of his resignation for Good Reason after the occurrence of any such event. Such resignation by Flynn will not be effective until the 30 th  day following Company’s receipt of such written notice and such resignation shall not be deemed to be for “Good Reason” hereunder unless the circumstance giving rise to Flynn’s resignation remains uncured by Company at the end of such 30-day period. Flynn’s delivery of a notice of termination for Good Reason shall not affect Flynn’s entitlement to severance payments, including but not limited to, Base Salary, Annual Cash Bonuses, Restricted Stock, 401(k) plan or other benefits provided hereunder upon a termination of employment for Good Reason.

 

5.9.      Voluntary Resignation. Notwithstanding anything to the contrary herein, Flynn at any time voluntarily may resign his employment with Company without Good Reason by providing sixty (60) days prior written notice to Company ( “Voluntary Resignation” ). In the event of Flynn’s Voluntary Resignation, Company shall have no obligation to Flynn for salary, bonus, or other compensation or any other form of benefits under this Agreement except for: (i) Base Salary earned prior to the effective date of such resignation, (ii) vested benefits Flynn has accrued under the 401(k) Plan or other ERISA plans provided by Company to all its employees, or (iii) other benefits mandated under state or federal law for terminated employees (such as COBRA health benefits). In the case of Flynn’s Voluntary Resignation, Company shall reimburse Flynn for all appropriately documented expenses incurred by Flynn prior to the termination date that are otherwise reimbursable to Flynn under this Agreement or Company policy. Upon the effective date of Voluntary Resignation, any unvested Restricted Shares shall lapse and Flynn shall have no further rights or privileges with respect thereto.

 

5.10.      Change of Control For purposes of this Agreement, “Change of Control” of the Company shall be deemed to have occurred at such time during the term of this Agreement or within any period of nine (9) months following a Company Voluntary Termination (as defined in Section 5.12 below) as: (i)  Change in Ownership : any person, entity, entities or group of persons (a “Person” ), other than (a) the current owners of Company, (b) Apex Oil Company, Inc., a Missouri corporation ( “Apex” ), or (c) any Person controlling, controlled by or under common control with Apex, including without limitation Paul A. Novelly ( “Novelly” ), Novelly’s family members or any trust created by or for the benefit of Novelly or his family members (collectively, “Permitted Owners” ), is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of Company representing more than 50% of Company’s outstanding voting securities or rights to acquire such securities, whether by agreement, merger or otherwise; or (ii)  Sale : any sale, lease, exchange or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of Company other than to Permitted Owners; or (iii)  Liquidation : a plan of complete liquidation or dissolution of Company or an agreement for the complete liquidation or dissolution of Company is approved and completed.

   

 
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5.11.      Change of Control; Minimum Value. In the event of a Change of Control, Flynn immediately and automatically shall be vested in and entitled to all 125,000 of the Restricted Shares; provided, however, that if upon the occurrence of a Change of Control (i) the value of the Restricted Shares is not equal to or greater than Two Million Five Hundred Thousand Dollars ($2,500,000) ( “Minimum Value” ), or (ii) the value of the rights to payment, equity securities or consideration to which Flynn will be entitled to receive on account of the Restricted Securities as a result of completion of the transaction precipitating the Change of Control is not equal to or greater than the Minimum Value, then Company promptly shall pay immediately to Flynn the amount of any such shortfall by company check or wire transfer to an account designated by Flynn.

   

5.12.      Company Voluntary Termination. Company voluntarily may terminate this Agreement (i) by written notice to Flynn at least 90 days prior to expiration of the Initial Term or any Renewal Term as specified in Section 2 above, in which case the termination of employment will be effective as of the last day of the Initial Term or Renewal Term, as applicable, or (ii) by written notice to Flynn of the Company’s voluntary termination without cause at any time after the end of the Initial Term, in which case the termination of Flynn’s employment will be effective immediately upon notice (each, a “Company Voluntary Termination” ). Payments by Company in the event of such termination are specified in Section 6 immediately below.

 

6.      Severance Benefits. In the event of termination of this Agreement either (i) by a Company Voluntary Termination, or (ii) by Flynn with Good Reason at any time during the term of this Agreement, (either, a “Selective Termination” ), Flynn shall receive severance benefits as described below in this Section 6, with the intent to provide Flynn a reasonable degree of economic security for a career transition.

 

6.1.      Selective Termination by Company. In the event of a Company Voluntary Termination, Flynn shall be entitled to immediate vesting of 50% of the balance of unvested Restricted Shares existing at the time of termination without any restrictions and Company shall cause such designated portion of the unvested Restricted Shares to be immediately tendered to Flynn. In addition, upon the occurrence of a Company Voluntary Termination, Flynn will continue to receive his Base Salary described in Section 3 above for a period of six (6) months immediately following any such termination (the “Severance Period” ). If Flynn is eligible for and elects to receive continuation group health coverage mandated by Section 4980B of the Internal Revenue Code or similar state laws ( “COBRA” ) during the Severance Period, Flynn shall be responsible for paying the COBRA premiums, provided that Company shall reimburse Flynn for the amount of such COBRA premiums.

   

 
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6.2.      Selective Termination by Flynn for Good Reason. For Selective Termination by Flynn for Good Reason, Flynn shall be entitled to immediate vesting of all 125,000 of the Restricted Shares, without any restrictions and Company shall cause any previously unvested Restricted Shares to be immediately tendered to Flynn. In addition, upon the occurrence of a Selective Terminatio