FutureFuel Corp.
FutureFuel Corp. (Form: 10-Q, Received: 08/10/2015 18:48:05)

 

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 June 30, 2015

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________

Commission file number: 0-52577

 

FUTUREFUEL CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

20-3340900

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer Identification No.)

8235 Forsyth Blvd., Suite 400

St. Louis, Missouri  63105

(Address of Principal Executive Offices)

 

(314) 854-8385

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  √  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  √  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer ☐

Accelerated filer

Non-accelerated filer ☐

(do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No  √

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 10, 2015: 43,722,388

 

 
 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

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

 

FutureFuel Corp.

Consolidated Balance Sheets

As of June 30, 2015 and December 31, 2014

(Dollars in thousands)

 

   

(Unaudited)

         
   

June

30 , 2015

   

December 31,

2014

 

Assets

               

Cash and cash equivalents

  $ 142,359     $ 124,079  

Accounts receivable, inclusive of federal $1.00 per gallon blenders’ tax credit (“BTC”) of $0 and $28,954, net of allowances for bad debt of $0 and $0 at June 30, 2015 and December 31, 2014, respectively

    19,651       50,135  

Accounts receivable – related parties

    5,131       1,173  

Inventory

    55,988       45,353  

Income tax receivable

    17,729       19,716  

Prepaid expenses

    946       1,670  

Prepaid expenses – related parties

    23       -  

Marketable securities

    85,943       87,720  

Deferred financing costs

    144       -  

Other current assets

    1,282       1,619  

Total current assets

    329,196       331,465  

Property, plant and equipment, net

    126,735       127,371  

Intangible assets

    1,408       -  

Deferred financing costs

    541       -  

Other assets

    2,861       2,652  

Total noncurrent assets

    131,545       130,023  

Total Assets

  $ 460,741     $ 461,488  
                 

Liabilities and Stockholders’ Equity

               

Accounts payable

  $ 30,211     $ 30,386  

Accounts payable – related parties

    2,191       2,912  

Current deferred income tax liability

    3,895       11,003  

Deferred revenue – short-term

    2,185       1,940  

Contingent liability – short-term

    1,151       1,151  

Accrued expenses and other current liabilities

    6,369       4,649  

Accrued expenses and other current liabilities – related parties

    313       46  

Total current liabilities

    46,315       52,087  

Deferred revenue – long-term

    16,412       15,927  

Other noncurrent liabilities

    3,362       4,024  

Noncurrent deferred income tax liability

    29,917       30,441  

Total noncurrent liabilities

    49,691       50,392  

Total liabilities

    96,006       102,479  

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 issued and outstanding as of June 30, 2015 and December 31, 2014, respectively

    4       4  

Accumulated other comprehensive income

    2,376       4,259  

Additional paid in capital

    278,584       277,652  

Retained earnings

    83,771       77,094  

Total stockholders’ equity

    364,735       359,009  

Total Liabilities and Stockholders’ Equity

  $ 460,741     $ 461,488  

 

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

 

 
1

 

 

FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

For the Three Months Ended June 30, 2015 and 2014

(Dollars in thousands, except per share amounts)

(Unaudited)

 

   

Three months ended

June 30 :

 
   

2015

   

2014

 
           

As

reclassified

 

Revenues

  $ 78,690     $ 66,933  

Revenues – related parties

    25,908       1,106  

Cost of goods sold

    96,900       47,865  

Cost of goods sold – related parties

    1,063       12,610  

Distribution

    986       907  

Distribution – related parties

    105       79  

Gross profit

    5,544       6,578  

Selling, general, and administrative expenses

               

Compensation expense

    1,059       855  

Other expense

    572       536  

Related party expense

    66       147  

Research and development expenses

    670       869  
      2,367       2,407  

Income from operations

    3,177       4,171  

Interest and dividend income

    1,405       1,567  

Interest expense

    (43 )     (7 )

Gain on marketable securities

    451       2,949  

Other expense

    (78 )     (64 )
      1,735       4,445  

Income before income taxes

    4,912       8,616  

Provision for income taxes

    1,119       3,269  

Net income

  $ 3,793     $ 5,347  
                 

Earnings per common share

               

Basic

  $ 0.09     $ 0.12  

Diluted

  $ 0.09     $ 0.12  

Weighted average shares outstanding

               

Basic

    43,420,923       43,352,836  

Diluted

    43,428,733       43,550,129  
                 

Comprehensive Income

               

Net income

  $ 3,793     $ 5,347  

Other comprehensive (loss)/income from unrealized net losses/gains on available-for-sale securities, net of tax of $(799) in 2015 and of $1,597 in 2014

    (1,282 )     2,511  

Comprehensive income

  $ 2,511     $ 7,858  

 

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

 

 
2

 

 

FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

For the Six Months Ended June 30, 2015 and 2014

(Dollars in thousands, except per share amounts)

(Unaudited)

 

   

Six months ended

June 30:

 
   

2015

   

2014

 
           

As

reclassified

 

Revenues

  $ 128,505     $ 147,236  

Revenues – related parties

    30,180       3,000  

Cost of goods sold

    135,210       98,952  

Cost of goods sold – related parties

    2,807       33,123  

Distribution

    1,634       1,791  

Distribution – related parties

    176       190  

Gross profit

    18,858       16,180  

Selling, general, and administrative expenses

               

Compensation expense

    2,212       1,609  

Other expense

    1,181       1,167  

Related party expense

    126       211  

Research and development expenses

    1,385       1,571  
      4,904       4,558  

Income from operations

    13,954       11,622  

Interest and dividend income

    2,672       3,937  

Interest expense

    (49 )     (13 )

Gain on marketable securities

    1,471       2,900  

Other income (expense)

    (122 )     166  
      3,972       6,990  

Income before income taxes

    17,926       18,612  

Provision for income taxes

    6,002       6,991  

Net income

  $ 11,924     $ 11,621  
                 

Earnings per common share

               

Basic

  $ 0.27     $ 0.27  

Diluted

  $ 0.27     $ 0.27  

Weighted average shares outstanding

               

Basic

    43,396,789       43,348,195  

Diluted

    43,405,641       43,471,880  
                 

Comprehensive Income

               

Net income

  $ 11,924     $ 11,621  

Other comprehensive income (loss) from unrealized net losses on available-for-sale securities, net of tax of $(1,174) in 2015 and of $1,088 in 2014

    (1,883 )     1,747  

Comprehensive income

  $ 10,041     $ 13,368  

 

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

 

 
3

 

 

FutureFuel Corp.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2015 and 2014

(Dollars in thousands)

(Unaudited)

 

   

Six months ended

June 30 :

 
   

2015

   

2014

 

Cash flows provided by operating activities

               

Net income

  $ 11,924     $ 11,621  

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

               

Depreciation

    4,872       4,527  

Amortization of deferred financing costs

    36       -  

Benefit for deferred income taxes

    (6,458 )     (1,469 )

Change in fair value of derivative instruments

    5,423       1,966  

Other than temporary impairment of marketable securities

    186       -  

Impairment of fixed assets

    -       247  

Gain on the sale of investments

    (1,657 )     (2,900 )

Stock based compensation

    954       204  

Losses on disposals of fixed assets

    122       4  

Noncash interest expense

    13       13  

Changes in operating assets and liabilities:

               

Accounts receivable

    30,484       7,589  

Accounts receivable – related parties

    (3,958 )     1,938  

Inventory

    (10,635 )     (25,177 )

Income tax receivable

    1,987       (1,029 )

Prepaid expenses

    724       1,052  

Prepaid expenses – related party

    (23 )     -  

Accrued interest on marketable securities

    (73 )     15  

Other assets

    (207 )     (110 )

Accounts payable

    (175 )     (2,902 )

Accounts payable – related parties

    (721 )     5,961  

Accrued expenses and other current liabilities

    1,720       (202 )

Accrued expenses and other current liabilities – related parties

    267       60  

Deferred revenue

    730       1,434  

Other noncurrent liabilities

    (675 )     -  

Net cash provided by operating activities

    34,860       2,842  

Cash flows from investing activities

               

Collateralization of derivative instruments

    (5,013 )     (3,337 )

Purchase of marketable securities

    (25,819 )     (18,247 )

Proceeds from the sale of marketable securities

    26,010       32,945  

Expenditures for intangible assets

    (1,408 )     -  

Capital expenditures

    (4,360 )     (5,715 )

Net cash (used in)/provided by investing activities

    (10,590 )     5,646  

Cash flows from financing activities

               

Minimum tax withholding on stock options exercised

    (22 )     (54 )

Excess tax benefits associated with stock options

    -       89  

Deferred financing costs

    (721 )     -  

Payment of dividends

    (5,247 )     (10,434 )

Net cash used in financing activities

    (5,990 )     (10,399 )

Net change in cash and cash equivalents

    18,280       (1,911 )

Cash and cash equivalents at beginning of period

    124,079       86,463  

Cash and cash equivalents at end of period

  $ 142,359     $ 84,552  
                 

Cash paid for interest

  $ -     $ -  

Cash paid for income taxes

  $ 11,147     $ 7,000  

 

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

 

 
4

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

1)              NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Organization

 

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

 

The chemicals segment manufactures a diversified 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 business segment primarily produces and sells biodiesel. FutureFuel Chemical Company also sells petrodiesel in blends with our biodiesel and, from time to time, with no biodiesel added. Finally, FutureFuel is a shipper of refined petroleum products on common carrier pipelines and buys and sells petroleum products to maintain an active shipper status on these pipelines.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared by FutureFuel in accordance and consistent with the accounting policies stated in FutureFuel’s 2014 audited consolidated financial statements and should be read in conjunction with the 2014 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; namely, FutureFuel Chemical, FFC Grain, L.L.C., FutureFuel Warehouse Company, L.L.C., and Legacy Regional Transport, L.L.C. Intercompany transactions and balances have been eliminated in consolidation.

 

 
5

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

2)             INVENTORY

 

The carrying values of inventory were as follows as of:

 

   

June 30,

2015

   

December 31,

2014

 

At average cost (approximates current cost)

               

Finished goods

  $ 24,184     $ 25,369  

Work in process

    2,666       2,391  

Raw materials and supplies

    34,156       25,935  
      61,006       53,695  

LIFO reserve

    (5,018 )     (8,342 )

Total inventory

  $ 55,988     $ 45,353  

 

In determining the LIFO cost of its inventory, FutureFuel relies on certain pricing indices.

 

In the three months ended June 30, 2015, these index values changed in such a way as to decrease FutureFuel’s LIFO cost relative to weighted average cost. As such, FutureFuel recorded an increase in its LIFO reserve of $345, the offset of which was recorded as an increase to cost of goods sold of $197 in the biofuels segment and an increase of $148 in the chemicals segment for the three months ended June 30, 2015. For the three months ended June 30, 2014, FutureFuel recorded an increase in its LIFO reserve of $500, the offset of which was recorded as an increase to cost of goods sold of $260 in the biofuels segment and an increase of $240 in the chemicals segment.

 

In the six months ended June 30, 2015, these index values changed in such a way as to increase FutureFuel’s LIFO cost relative to weighted average cost. As such, FutureFuel recorded a reduction in its LIFO reserve of $3,324, the offset of which was recorded as a reduction to cost of goods sold of $2,282 in the biofuels segment and a reduction of $1,042 in the chemicals segment for the six months ended June 30, 2015.  For the six months ended June 30, 2014, FutureFuel recorded an increase in its LIFO reserve of $732, the offset of which was recorded as an increase to cost of goods sold of $344 in the biofuels segment and an increase of $388 in the chemicals segment.

 

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. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statement of operations as a component of cost of goods sold within the biodiesel segment, and amounted to losses of $3,056 and $232 for the three months ended June 30, 2015 and 2014, respectively, and losses of $2,337 and $294 for the six months ended June 30, 2015 and 2014, respectively.

 

 
6

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

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

 

   

Asset/(Liability)

 
   

June 30, 2015

   

December 31, 2014

 
   

Quantity

(contracts)

Short

   

Fair

Value

   

Quantity

(contracts)

Short

   

Fair Value

 

Regulated options, included in other current assets

    (450 )   $ (1,407 )     (350 )   $ (794 )

Regulated fixed price future commitments, included in other current assets

    (175 )   $ (3,946 )     (225 )   $ 862  

 

The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $6,477 and $1,464 at June 30, 2015 and December 31, 2014, respectively. The carrying values of the margin account and of the derivative instruments are included, net, in other current assets.

 

4)            MARKETABLE SECURITIES

 

At June 30, 2015 and December 31, 2014, FutureFuel had investments in certain preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments. 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.

 

FutureFuel’s marketable securities were comprised of the following at June 30, 2015 and December 31, 2014:

 

   

June 30, 2015

 
   

Adjusted

Cost

   

Unrealized

Gains

   

Unrealized

L osses

   

Fair

Value

 

Equity instruments

  $ 22,584     $ 2,641     $ (1,022 )   $ 24,203  

Preferred stock

    32,715       1,274       (205 )     33,784  

Trust preferred securities

    18,488       1,190       (52 )     19,626  

Exchange traded debt instruments

    8,300       122       (92 )     8,330  

Total

  $ 82,087     $ 5,227     $ (1,371 )   $ 85,943  

 

   

December 31, 2014

 
   

Adjusted

Cost

   

Unrealized

Gains

   

Unrealized

Losses

   

Fair

Value

 

Equity instruments

  $ 35,062     $ 5,214     $ (1,526 )   $ 38,750  

Preferred stock

    21,660       1,626       -       23,286  

Trust preferred securities

    18,920       1,285       (1 )     20,204  

Exchange traded debt instruments

    5,292       192       (4 )     5,480  

Total

  $ 80,934     $ 8,317     $ (1,531 )   $ 87,720  

 

The aggregate fair value of instruments with unrealized losses totaled $23,545 and $15,688 at June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015 and December 31, 2014, FutureFuel had no investments in marketable securities that were in an unrealized loss position for a greater than 12-month period, respectively.

 

 

 
7

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

5)            ACCRUED AND OTHER CURRENT LIABILITIES

 

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

 

   

June 30 ,

2015

   

December 31,

2014

 

Accrued employee liabilities

  $ 4,222     $ 3,227  

Accrued property, use, and franchise taxes

    1,712       1,340  

Other

    748       128  

Total

  $ 6,682     $ 4,695  

 

6)            BORROWINGS

 

On April 16, 2015, FutureFuel, with FutureFuel Chemical as borrowers, and certain of FutureFuel’s other subsidiaries, as guarantors, entered into a $150,000,000 secured and committed credit facility with the lenders party thereto, Regions Bank as administrative agent and collateral agent, and PNC Bank, N.A., as syndication agent. The credit facility consists of a five-year revolving credit facility in a dollar amount of up to $150,000,000, which includes a sublimit of $30,000,000 for letters of credit and $15,000,000 for swingline loans (collectively, the “Credit Facility”).

 

The interest rate floats at the following margins over LIBOR or base rate based upon the leverage ratio from time to time:

 

Consolidated

Leverage Ratio

 

 

Adjusted LIBOR Rate Loans and

Letter of Credit Fee

   

 

Base Rate

Loans

   

 

Commitment

Fee   

 
   

 <

1.00 :1.0     1.25%       0.25%       0.15%  
1.00

:1.0 and <

1.50 :1.0     1.50%       0.50%       0.20%  
1.50

:1.0 and  <

2.00 :1.0     1.75%       0.75%       0.25%  
2.00

:1.0 and <

2.50 :1.0     2.00%       1.00%       0.30%  
2.50

 

  :1.0     2.25%       1.25%       0.35%  

 

The terms of the Credit Facility contain certain covenants and conditions including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and a minimum liquidity requirement.  FutureFuel was in compliance with such covenants as of June 30, 2015.  

 

There were no borrowings under this credit agreement at June 30, 2015 and there were no borrowings under the former credit agreement at December 31, 2014, which terminated on April 16, 2015.

 

 
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.

 

   

Three months ended

June 30 :

   

Six months ended

June 30 :

 
   

2015

   

2014

   

2015

   

2014

 

Provision for income taxes

  $ 1,119     $ 3,269     $ 6,002     $ 6,991  

Effective tax rate

    22.8 %     37.9 %     33.5 %     37.6 %

 

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

 

Unrecognized tax benefits totaled $3,117and $2,981 at June 30, 2015 and December 31, 2014, respectively, and was included in other noncurrent liabilities on the balance sheet.

 

FutureFuel records interest and penalties net as a component of income tax expense.  At June 30, 2015 and December 31, 2014, respectively, FutureFuel recorded $113 and $46 in accruals for interest and tax penalties.

 

In the second quarter of 2015, the IRS completed its audit of FutureFuel’s 2010 through 2012 amended federal income tax returns. FutureFuel was successful in recovering the benefits previously unrecorded in its financial statements. Also during the second quarter of 2015, FutureFuel received notice of rejection from an administrative law judge in The Arkansas Office of Hearings and Appeals regarding FutureFuel’s 2010 through 2012 amended state income tax returns. In connection with these matters, FutureFuel recognized a net income tax benefit of $695 in the second quarter of 2015 upon the recognition of previously unrecognized net tax benefits.

 

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 non-vested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at June 30, 2015 or 2014.

 

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 six-month periods ended June 30, 2015 or 2014 as the vesting conditions had not been satisfied.

 

 
9

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

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

 

   

For the three months ended

June 30:

   

For the six months ended

June 30:

 
   

2015

   

2014

   

2015

   

2014

 
Numerator:                                

Net income

  $ 3,793     $ 5,347     $ 11,924     $ 11,621  

Less: distributed earnings allocated to non-vested restricted stock

    (16 )     (30 )     (37 )     (30 )

Less: undistributed earnings allocated to non-vested restricted stock

    (7 )     (1 )     (49 )     (7 )

Numerator for basic earnings per share

  $ 3,770     $ 5,316     $ 11,838     $ 11,584  

Effect of dilutive securities:

                               

Add: undistributed earnings allocated to non-vested restricted stock

    7       1       49       7  

Less: undistributed earnings reallocated to non-vested restricted stock

    (7 )     (1 )     (49 )     (7 )

Numerator for diluted earnings per share

  $ 3,770     $ 5,316     $ 11,838     $ 11,584  

Denominator:

                               

Weighted average shares outstanding – basic

    43,420,923       43,352,836       43,396,789       43,348,195  

Effect of dilutive securities:

                               

Stock options and other awards

    7,810       197,293       8,852       123,685  

Weighted average shares outstanding – diluted

    43,428,733       43,550,129       43,405,641       43,471,880  
                                 

Basic earnings per share

  $ 0.09     $ 0.12     $ 0.27     $ 0.27  

Diluted earnings per share

  $ 0.09     $ 0.12     $ 0.27     $ 0.27  

 

Certain options to purchase FutureFuel’s common stock were not included in the computation of diluted earnings per share for the three and six-months ended June 30, 2015 because they were anti-dilutive in the period. The weighted average number of options excluded on this basis was 100,000 for both the three and six-months ended June 30, 2015. No options to purchase shares of FutureFuel’s common stock were excluded from the computation of diluted earnings per share for the three and six-months ended June 30, 2014.

 

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 chemicals for specific customers); and “performance chemicals” (multi-customer specialty chemicals).

 

 
10

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

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

 

June 30, 2015

  $ 104,157     $ 441     $ 104,598  

June 30, 2014

  $ 66,461     $ 1,578     $ 68,039  

 

Six months ended:

 

United

States

   

All Foreign

Countries

   

Total

 

June 30, 2015

  $ 157,734     $ 951     $ 158,685  

June 30, 2014

  $ 146,389     $ 3,847     $ 150,236  

 

For the three months ended June 30, 2015 and 2014, revenues from Mexico accounted for 0% and 2%, respectively, of total revenues. For the six months ended June 30, 2015 and 2014, revenues from Mexico accounted for 0% and 2% of total revenues, respectively. Other than Mexico, revenues from a single foreign country during the three and six-months ended June 30, 2015 and 2014 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

 

 

Three months ended

June 30 :

 

Six months ended

June 30 :

 
    2015     2014     2015     2014  

Revenues

                       

Chemicals

$ 32,688   $ 32,609   $ 66,894   $ 62,885  

Biofuels

  71,910     35,430     91,791     87,351  

Revenues

$ 104,598   $ 68,039   $ 158,685   $ 150,236  
                         

Segment gross profit

                       

Chemicals

$ 10,012   $ 7,131   $ 20,865   $ 16,165  

Biofuels

  (4,468 )   (553 )   (2,007 )   15  

Segment gross margins

  5,544     6,578     18,858     16,180  

Corporate expenses

  (2,367 )   (2,407 )   (4,904 )   (4,558 )

Income before interest and taxes

  3,177     4,171     13,954     11,622  

Interest and other income

  1,856     4,516     4,143     7,003  

Interest and other expense

  (121 )   (71 )   (171 )   (13 )

Provision for income taxes

  (1,119 )   (3,269 )   (6,002 )   (6,991 )

Net income

$ 3,793   $ 5,347   $ 11,924   $ 11,621  

 

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 June 30, 2015 and December 31, 2014.

 

   

Asset/(Liability)

 
   

Fair Value at

June 30 ,

   

Fair Value Measurements Using

Inputs Considered as:

 

 

 

2015

   

Level 1

   

Level 2

   

Level 3

 
Description                                

Derivative instruments

  $ (5,353 )   $ (5,353 )   $ -     $ -  

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

  $ 85,943     $ 85,943     $ -     $ -  

 

 

   

Asset/(Liability)

 
   

Fair Value at

December 31,

   

Fair Value Measurements Using

Inputs Considered as:

 

 

 

2014

   

Level 1

   

Level 2

   

Level 3

 
Description                                

Derivative instruments

  $ 68     $ 68     $ -     $ -  

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

  $ 87,720     $ 87,720     $ -     $ -  

 

11)          RECLASSIFICATIONS FROM ACCUMULATED AND OTHER COMPREHENSIVE INCOME:

 

The following tables summarize changes in accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities in the three months ended June 30, 2015 and 2014.

 

Changes in Accumulated Other Comprehensive Income

Unrealized   Gains and Losses on Available-for-Sale Securities

For the t hree months ended June 30, 2015 and 2014

(net of tax)

   

2015

   

201 4

 

Balance at March 31

  $ 3,658     $ 6,672  

Other comprehensive loss/(gain) before reclassifications

    (1,004 )     6,042  

Amounts reclassified from accumulated other comprehensive income

    (278 )     (3,531 )

Net current-period other comprehensive (loss)/gain

    (1,282 )     2,511  

Balance at June 30

  $ 2,376     $ 9,183  

 

 

 
13

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Changes in Accumulated Other Comprehensive Income

Unrealized Gains and Losses on Available-for-Sale Securities

For the s ix months ended June 30, 2015 and 2014

(net of tax)

   

201 5

   

201 4

 

Balance at December 31

  $ 4,259     $ 7,436  

Other comprehensive (loss)/gain before reclassifications

    (977 )     5,266  

Amounts reclassified from accumulated other comprehensive income

    (906 )     (3,519 )

Net current-period other comprehensive (loss)/gain

    (1,883 )     1,747  

Balance at June 30

  $ 2,376     $ 9,183  

 

The following tables summarize amounts reclassified from accumulated other comprehensive income in the three and six-months ended June 30, 2015 and 2014:

 

   

Reclassifications from Accumulated

Other Comprehensive Income

   

Three months ended

June 30, 2015

   

Six months ended

June 30, 2015

 

Affected Line Item in

Statement of Operations

Unrealized gain on available- for-sale securities

  $ 451     $ 1,471  

Gains on marketable securities

Total before tax

    451       1,471    

Tax provision

    (173 )     (565 )  

Total reclassifications

  $ 278     $ 906    

 

 

   

Three months ended

June 30, 2014

   

Six months ended

June 30, 2014

 

Affected Line Item in

Statement of Operations

Unrealized gain on available-for-sale securities

  $ 5,732     $ 5,713  

Gains on marketable securities

Total before tax

    5,732       5,713    

Tax provision

    (2,201 )     (2,194 )  

Total reclassifications

  $ 3,531     $ 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.

 

 
14

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

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, and income tax and consulting services by FutureFuel from these related parties.

 

As previously disclosed, related party costs of goods sold for the three and six-months ended June 30, 2014 have been reclassified from their prior presentation. For revised prior period comparative information, please see Note 19 – “Related party transactions” in the notes to consolidated financial statements in our Form 10-K for the year ended December 31, 2014.

 

14)          RECENTLY ISSUED ACCOUNTING STATEMENTS  

 

In July 2015, the Financial Accounting Standards Board (“FASB”) issued new guidance that requires inventory not measured using either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. The new standard will be effective for periods on or after December 15, 2016 and will be applied prospectively. Early adoption is permitted. FutureFuel is evaluating the impact that this new guidance will have on our Consolidated Financial Statements and related Note disclosures.

 

In April 2015, the FASB issued new guidance related to presentation of debt issue costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 with early adoption permitted. FutureFuel adopted this standard early effective April 1, 2015. However, since no borrowings were outstanding against the credit facility at June 30, 2015, FutureFuel has shown the payment of these debt issuance costs as an asset.

 

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. However, in a July 2015 meeting, the FASB affirmed its proposal to defer the effective date by one year. The provisions of the ASU are to be applied retrospectively; early adoption prior to the original effective date is not permitted. FutureFuel is currently evaluating the impact on its financial position, results of operations, and related disclosures.

 

 
15

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

15)          INTANGIBLE ASSET

 

In April of 2015, FutureFuel acquired additional historical line space on a pipeline for $1,408. The acquired line space was recorded as an intangible asset with an indefinite life as there was no foreseeable limit on the time period over which it is expected to contribute to cash flows. The carrying value of the asset was $1,408 and $0, respectively, as of June 30, 2015 and 2014. The Company will test the intangible asset for impairment in accordance with codification ASC 350-30-35-18 through 35-20.

 

 
16

 

 

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 June 30, 2015 Compared to Three Months Ended June 30, 2014

 

Set forth below is a summary of certain financial information for the periods indicated.

 

(Dollars in thousands other than per share amounts)

 

   

Three months

ended June

30, 2015

   

Three months

ended June

30, 2014

   

Dollar

Change

   

%

Change

 

Revenues

  $ 104,598     $ 68,039     $ 36,559       53.7 %

Income from operations

  $ 3,177     $ 4,171     $ (994 )     (23.8 %)

Net income

  $ 3,793     $ 5,347     $ (1,554 )     (29.1 %)

Earnings per common share:

                               

Basic

  $ 0.09     $ 0.12     $ (0.03 )     (25.0 %)

Diluted

  $ 0.09     $ 0.12     $ (0.03 )     (25.0 %)

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

  $ 2,651     $ 2,641     $ 10       0.4 %

Adjusted EBITDA

  $ 9,317     $ 6,709     $ 2,608       38.9 %

 

We use adjusted EBITDA as a key operating metric to measure both performance and liquidity. Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is not a substitute for operating income, net income, or cash flow from operating activities (each as determined in accordance with GAAP) as a measure of performance or liquidity. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP. We define adjusted EBITDA as net income before interest, income taxes, depreciation, and amortization expenses, excluding, when applicable, non-cash stock-based compensation expenses, public offering expenses, acquisition-related transaction costs, purchase accounting adjustments, losses on disposal of property and equipment, gains or losses on derivative instruments, and other non-operating income or expenses. Information relating to adjusted EBITDA is provided so that investors have the same data that we employ in assessing the overall operation and liquidity of our business. Our calculation of adjusted EBITDA may be different from similarly titled measures used by other companies; therefore, the results of our calculation are not necessarily comparable to the results of other companies.

 

Adjusted EBITDA allows our chief operating decision makers to assess the performance and liquidity of our business on a consolidated basis to assess the ability of our operating segments to produce operating cash flow to fund working capital needs, to fund capital expenditures, and to pay dividends. In particular, our management believes that adjusted EBITDA permits a comparative assessment of our operating performance and our liquidity, relative to a performance and liquidity based on GAAP results, while isolating the effects of depreciation and amortization, which may vary among our operating segments without any correlation to their underlying operating performance, and of non-cash stock-based compensation expense, which is a non-cash expense that varies widely among similar companies, and gains and losses on derivative instruments, whose immediate recognition can cause net income to be volatile from period to period due to the timing of the valuation change in the derivative instruments relative to the sale of biofuel.

 

 
17

 

 

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

 

(Dollars in thousands) 

 

   

Three months

ended

June 30, 2015

   

Three months

ended

June 30, 2014

 

Adjusted EBITDA

  $ 9,317     $ 6,709  

Depreciation and amortization

    (2,607 )     (2,167 )

Non-cash stock-based compensation

    (477 )     (204 )

Interest and dividend income

    1,405       1,567  

Interest expense

    (43 )     (7 )

Gains/(losses) on disposal of property and equipment

    (78 )     1  

Losses on derivative instruments

    (3,056 )     (232 )

Gain on marketable securities

    451       2,949  

Income tax expense

    (1,119 )     (3,269 )

Net income

  $ 3,793     $ 5,347  

 

Revenues

 

Revenues for the three months ended June 30, 2015 were $104,598,000 as compared to revenues for the three months ended June 30, 2014 of $68,039,000, an increase of 54%. Revenues from biofuels were $71,910,000, an increase of $36,480,000 from the second quarter of 2014 and accounted for 69% of total revenues in the second quarter of 2015 as compared to 52% in the second quarter of 2014. Revenues from chemicals were $32,688,000 in the second quarter of 2015, relatively unchanged from the second quarter of 2014 at $32,609,000 and accounted for 31% of total revenues in the second quarter of 2015 as compared to 48% in the second quarter of 2014. Within the chemicals segment, revenues for the three months ended June 30, 2015 changed as follows compared to the three months ended June 30, 2014: (i) revenues from the proprietary herbicides and associated intermediates increased 75% relative to the revenues recognized in the prior period ; (ii) revenues from an industrial intermediate utilized in the antimicrobial industry and other custom chemicals increased 25%; (iii) revenues from the bleach activator decreased 41% and (iv) revenues from the performance chemicals product group decreased 14%.

 

Revenue from the bleach activator has historically been the most significant component of our chemicals segment’s revenue base, however, it accounted for only 6% of total revenues for the three months ended June 30, 2015 as compared to 16% of total revenues in June 30, 2014. The future volume of and revenues from the bleach activator will depend on consumer demand for powder laundry detergents relative to liquid detergents and the availability of substitute products. Revenues for the bleach activator decreased on reduced volumes in the three months ended June 30, 2015. On March 18, 2015, the primary bleach activator customer sent a notice of termination of our supply contract with that customer effective December 31, 2015. While the termination of our existing supply contract will adversely affect future revenue, discussions with our customer to extend our business relationship beyond that date are ongoing.

 

With respect to the proprietary herbicide and associated intermediates, sales volume increased 200% for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014. Revenue increased 75% due to product mix. The results for the three months ended June 30, 2014 reflected the phasing out of the legacy proprietary herbicide customer and the ramp up to target production of a replacement herbicide intermediate product.

 

Revenues from the industrial intermediate utilized in the antimicrobial industry and other custom chemical products increased 25% in the second quarter of 2015 as compared to the second quarter of 2014. Increased sales volumes from increased demand of two existing products primarily accounted for the increase.

 

Revenues from performance chemicals customers decreased 14% for the second quarter of 2015 as compared to the second quarter of 2014 and accounted for approximately 4% of total revenues for the three months ended June 30, 2015. The decrease was due in part to decreased demand from various customers for three products.

 

 
18

 

 

Revenues from biofuels increased $36,480,000 from the second quarter of 2014 to $71,910,000 in the second quarter of 2015. Revenues from biofuels benefited in the second quarter of 2015 from the sale of refined petroleum products on common carrier pipelines. Such sales totaled $28,186,000 and $784,000 in the three months ended June 30 of 2015 and 2014, respectively. We also experienced a 75% increase in the sales volume of biodiesel and diesel in the second quarter of 2015 as compared to the second quarter of 2014, however, the average selling price was significantly depressed. Reduced regulatory uncertainty associated with the EPA's proposed volumes for biomass-based diesel supported this volume growth for biodiesel, however, margins were depressed by the global declines in fuel prices.

 

Cost of Goods Sold and Distribution

 

Total cost of goods sold and distribution for the second quarter of 2015 were $99,054,000 as compared to $61,461,000 for the second quarter of 2014, an increase of 61%, which compares to a 54% increase in revenues for the period.

 

Cost of goods sold and distribution for the three months ended June 30, 2015 for our chemicals segment totaled $22,676,000 as compared to $25,478,000 for the three months ended June 30, 2014. On a percentage basis, chemicals segment cost of goods sold and distribution decreased approximately 11% for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. This compares against flat chemical segment revenue for the same comparison periods. This difference was largely the result of product mix and improved yields on two product lines, including the benefit of the new proprietary herbicide plant which had startup problems in the second quarter of 2014.

 

Cost of goods sold and distribution for the second quarter of 2015 in our biofuels segment were $76,378,000 as compared to $35,983,000 for the second quarter of 2014. On a percentage basis, cost of goods sold and distribution increased 112% versus a 103% increase in revenues. The higher increase in cost of goods sold as compared to the change in revenues was attributed to the following: (i) the change in hedging losses incurred during the second quarter of 2015 of $3,056,000 as compared to $232,000 in the second quarter of 2014; (ii) a significant amount of RIN inventory existing at the end of the second quarter of 2015 at an average market value of $0.86 per RIN as compared to fewer RINs held at the end of the second quarter of 2014 at an average market value of $0.57 per RIN; and (iii) a disproportionate decline in biodiesel prices compared to feedstock prices.

 

Operating Expenses

 

Operating expenses were $2,367,000 and $2,407,000 in the three months ended June 30, 2015 and 2014, respectively.

 

Provision for Income Taxes 

 

The effective tax rate for the three months ended June 30, 2015 and June 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. Additionally, the effective tax rate for the three months ended June 30, 2015 reflects changes in estimates concerning FutureFuel’s unrecognized tax benefits. FutureFuel’s effective tax rate for the three months ended June 30, 2015 is lower than it would have been otherwise. This reduced rate is not expected to continue for the remainder of 2015.

 

Net Income

 

Net income for the quarter ended June 30, 2015 decreased 29% to $3,793,000 from $5,347,000 during the same quarter in 2014, due primarily to the (i) losses on derivative instruments and (ii) the increase in RIN inventory in our biofuels segment, which was mitigated by improved margins from the chemicals segment and gains on marketable securities for the current quarter.

 

 
19

 

 

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

 

Set forth below is a summary of certain financial information for the periods indicated.

 

(Dollars in thousands other than per share amounts)

 

   

Six m onths

ended June

30, 2015

   

Six months

Ended June

30, 2014

   

Dollar

Change

   

%

Change

 

Revenues

  $ 158,685     $ 150,236     $ 8,449       5.6 %

Income from operations

  $ 13,954     $ 11,622     $ 2,232       20.1 %

Net income

  $ 11,924     $ 11,621     $ 303       2.6 %

Earnings per common share:

                               

Basic

  $ 0.27     $ 0.27     $ 0.00       0.0 %

Diluted

  $ 0.27     $ 0.27     $ 0.00       0.0 %

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

  $ 4,971     $ 5,119     $ (148 )     (2.9 %)

Adjusted EBITDA

  $ 22,153     $ 16,817     $ 5,336       31.7 %

 

See the discussion above regarding our use of adjusted EBITDA.

 

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

 

(Dollars in thousands)

 

   

Six months ended

June 30, 2015

   

Six months ended

June 30, 2014

 

Adjusted EBITDA

  $ 22,153     $ 16,817  

Depreciation and amortization

    (4,908 )     (4,527 )

Non-cash stock-based compensation

    (954 )     (204 )

Interest and dividend income

    2,672       3,937  

Interest expense

    (49 )     (13 )

Loss on disposal of property and equipment

    (122 )     (4 )

Losses on derivative instruments

    (2,337 )     (294 )

Gains on marketable securities

    1,471       2,900  

Income tax expense

    (6,002 )     (6,991 )

Net income

  $ 11,924     $ 11,621  

 

 

 
20

 

 

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

 

(Dollars in thousands) 

 

   

Six months e nded

June 30, 2015

   

Six months e nded

June 30, 2014

 

Adjusted EBITDA

  $ 22,153     $ 16,817  

Amortization of deferred financing costs

    (36 )     -  

Benefit from deferred income taxes

    (6,458 )     (1,469 )

Impairment of fixed assets

    -       247  

Interest and dividend income

    2,672       3,937  

Income tax expense

    (6,002 )     (6,991 )

Losses on derivative instruments

    (2,337 )     (294 )

Change in fair value of derivative instruments

    5,423       1,966  

Changes in operating assets and liabilities, net

    19,445       (11,371 )

Net cash provided by operating activities

  $ 34,860     $ 2,842  

 

Revenues

 

Revenues for the six months ended June 30, 2015 were $158,685,000 as compared to revenues for the six months ended June 30, 2014 of $150,236,000, an increase of 6%. Revenues from biofuels were $91,791,000, an increase of 5% or $4,440,000 from the first six months of 2014 and accounted for 58% of total revenues in the first six months of 2015 and 2014. Revenues from chemicals increased 6% and accounted for 42% of total revenues in the first six months of 2015 and 2014. Within the chemicals segment, revenues for the six months ended June 30, 2015 changed as follows compared to the six months ended June 30, 2014: (i) revenues from the proprietary herbicides and associated intermediates increased 97%; (ii) revenues from an industrial intermediate utilized in the antimicrobial industry and other custom chemicals increased 26%; (iii) revenues from the bleach activator decreased 34% and (iv) revenues from the performance chemicals product group decreased 4%.

 

With respect to the proprietary herbicide and associated intermediates, revenue increased 97% for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. The results for the six months ended June 30, 2014 reflected the phasing out of the legacy proprietary herbicide customer along with a challenged start for new product production.

 

Revenues from the industrial intermediate utilized in the antimicrobial industry and other custom chemical products increased 26% in the first six months of 2015 as compared to the first six months of 2014. Increased sales volumes of two existing products accounted for the increase.

 

Revenue from the bleach activator accounted for 9% of total revenues for the six months ended June 30, 2015 as compared to 15% in the six months ended June 30, 2014. The future volume of and revenues from the bleach activator will depend on consumer demand for powder laundry detergents relative to liquid detergents and the availability of substitute products. Revenues for the bleach activator decreased on reduced volumes in the six months ended June 30, 2015, and our primary bleach activator customer advised us on March 18, 2015 that it would be terminating our supply contract at the end of 2015. Although the termination of our existing supply contract will adversely affect future revenue, discussions with our customer to extend our business relationship beyond that date are ongoing.

 

Revenues from performance chemicals customers decreased 4% for the first six months of 2015 as compared to the first six months of 2014 and accounted for approximately 6% of total revenues for the six months ended June 30, 2015. The decrease was due in part to reduced demand from various customers for three products which was partially offset by increased demand for two products.

 

 
21

 

 

Revenues from biofuels increased to $91,791,000 in the first six months of 2015 as compared to $87,351,000 in the first six months of 2014. Revenues from biofuels benefited in part from the sale of refined petroleum products on common carrier pipelines. Such sales totaled $31,543,000 and $1,478,000 in the first six months of 2015 and 2014, respectively. This increase was offset by a 2% lower sales volume of biodiesel and diesel in the first six months of 2015 as compared to the first six months of 2014, primarily as a result of reduced overall demand from our major customers and a significant average selling price reduction in the weakened renewable energy market, which tracked a global decline in fuel prices.

 

Cost of Goods Sold and Distribution

 

Total cost of goods sold and distribution for the first six months of 2015 were $139,827,000 as compared to $134,056,000 for the first six months of 2014, an increase of 4%, which compares to a 6% increase in revenues for the period.

 

Cost of goods sold and distribution for the six months ended June 30, 2015 for our chemicals segment totaled $46,029,000 as compared to $46,720,000 for the six months ended June 30, 2014. On a percentage basis, chemicals segment cost of goods sold and distribution decreased approximately 1% for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. This compares against a 6% increase in chemical segment revenue for the same comparison periods. This difference was largely a result of product mix and the benefit of the new proprietary herbicide plant which had startup problems in the first six months of 2014, and the benefit from adjustments in our inventory carrying value as determined utilizing the LIFO method of inventory accounting. Regarding LIFO, significant deflation from the pricing indices we used resulted in a reduction to cost of goods sold of $1,042,000 in the 6 months ended June 30, 2015 and resulted in an increase in cost of goods sold of $388,000 in the 6 months ended June 30, 2014.

 

Cost of goods sold and distribution for the first six months of 2015 in our biofuels segment were $93,798,000 as compared to $87,336,000 for the first six months of 2014. On a percentage basis, cost of goods sold and distribution increased 7% versus a 5% increase in revenues.  This change was attributed to i) higher hedging losses in the first half of 2015 of $2,337,000 as compared to hedging losses of $294,000 in the first half of 2014 and ii) the significant RIN inventory that was generated in the first half of 2015 and not sold compared to RIN inventory held in the first half of 2014 and not sold. Benefiting cost of goods sold were adjustments in our inventory carrying value as determined utilizing the LIFO method of inventory accounting. Regarding LIFO, significant deflation from the pricing indices we used resulted in a reduction to cost of goods sold of $2,282,000 in the six months ended June 30, 2015 and resulted in an increase in cost of goods sold of $344,000 in the six months ended June 30, 2014.

 

Operating Expenses

 

Operating expenses increased 8% to $4,904,000 in the first six months of 2015 from $4,558,000 in the first six months of 2014. This increase was attributable to stock based compensation granted in May and September during 2014. No stock based compensation has been granted in 2015.

 

Provision for Income Taxes

 

The effective tax rate for the six months ended June 30, 2015 and June 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. Additionally, the effective tax rate for the six months ended June 30, 2015 reflects changes in estimates concerning FutureFuel’s unrecognized tax benefits. FutureFuel’s effective tax rate for the six months ended June 30, 2015 is lower than it would have been otherwise. This reduced rate is not expected to continue for the remainder of 2015.

 

Net Income

 

Net income for the six months ended June 30, 2015 increased 3% to $11,924,000 from $11,621,000 during the same period in 2014, due primarily to improved profit in the chemicals segment, and mostly offset by losses on derivative instruments, the increase in RIN inventory in the biofuels segment, reduced gains on marketable securities, and interest income.

 

 
22

 

 

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 the three months ended June 30, 2015 and 2014 related to specialty chemical customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use. These sales were subject to written monthly purchase orders with agreement that production was reasonable. The inventory was custom manufactured and stored at the customer’s request and could not be sold to another buyer. Credit and payment terms for bill and hold customers are similar to other specialty chemical customers. Sales revenue under bill and hold arrangements were $15,216,000 and $18,204,000 for the six months ended June 30, 2015 and 2014, respectively.

 

Liquidity and Capital Resources 

 

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

 

(Dollars in thousands)

 

   

June 30, 2015

   

June 30, 2014

 

Net cash provided by operating activities

  $ 34,860     $ 2,842  

Net cash (used) in/provided by investing activities

  $ (10,590 )   $ 5,646  

Net cash used by financing activities

  $ (5,990 )   $ (10,399 )

 

Operating Activities

 

Cash from operating activities increased from $2,842,000 of cash provided by operating activities in the first six months of 2014 to $34,860,000 of cash provided by operating activities in the first six months of 2015. This increase was primarily attributable to the change in our accounts receivable, including accounts receivable from related parties. In the first six months of 2015, the change in accounts receivable, including accounts receivable from related parties, increased cash provided by operating activities by $26,526,000. In the first six months of 2014, the change in accounts receivable, including accounts receivable from related parties, increased cash from operating activities by $9,527,000. The decrease in accounts receivable balances in 2015 was primarily related to the cash received for the BTC that was retroactively reinstated in December 2014 to January 1, 2014. The decrease in accounts receivable balances in 2014 was primarily related to the timing and amount of sales made on a common carrier pipeline. Reducing this increase to cash from operating activities was an increase in inventory balances for the first six months of 2015 as compared to the increase in inventory balances for the first six months of 2014. In the first six months of 2015, inventory purchases decreased cash from operating activities by $10,635,000. In the first six months of 2014, changes in inventory carrying values decreased cash from operating activities by $25,177,000. The smaller increase in the inventory carrying value in the first six months of 2015 was primarily due to the timing and amount of purchases made on a common carrier pipeline.

 

 
23

 

 

Investing Activities

 

Cash used in investing activities was $10,590,000 in the first six months of 2015 as compared to cash provided by investing activities in the first six months of 2014 of $5,646,000. This change was primarily the result of net sales of marketable securities in the first six months of 2015 compared to the first six months of 2014. Such net sales totaled $14,698,000 in the first six months of 2014 and such net sales totaled $191,000 in the first six months of 2015. Our capital expenditures and customer reimbursements for capital expenditures are summarized in the following table:

 

(Dollars in thousands)

 

   

Six months

ended

June 30, 2015

   

Six months

ended

June 30, 2014

 

Cash paid for capital expenditures and intangibles

  $ 5,768     $ 5,715  

Cash received as reimbursement of capital expenditures

    (797 )     (596 )

Cash paid, net of reimbursement, for capital expenditures

  $ 4,971     $ 5,119  

 

Financing Activities

 

Cash used in financing activities decreased from $10,399,000 for the first six months of 2014 to $5,990,000 of cash used in financing activities in the first six months of 2015. This change is primarily the result of a decrease in cash used for dividend payments. In the first six months of 2014, dividends paid totaled $10,434,000. In the first six months of 2015, dividends paid totaled $5,247,000. Cash used for financing costs for the first six months of 2015 were $721,000 and no such costs existed in the first six months of 2014.

 

Credit Facility

 

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

 

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

 

Dividends

 

In the first two quarters of 2015, we paid a regular cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $2,623,000 in the first quarter of 2015 and $2,624,000 in the second quarter of 2015, for aggregate dividend payments of $5,247,000 in the first six months of 2015.

 

In the first two 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 and $5,233,000 in the second quarter of 2014, for aggregate dividend payments of $10,434,000 in the first six months of 2014.

 

Capital Management

 

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

 

 
24

 

 

 

A significant portion of these funds were held in cash or cash equivalents at multiple financial institutions. In the periods ended June 30, 2015 and December 31, 2014, we also had investments in certain preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments. We classify these investments as current assets in the accompanying consolidated balance sheets and designate them as being “available-for-sale.” Accordingly, they are recorded at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity. The fair value of these preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments totaled $85,943,000 and $87,720,000 at June 30, 2015 and December 31, 2014, respectively.

 

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

 

 

Off-Balance Sheet Arrangements

 

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

 

 
25

 

 

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 term sale contracts that include contractual market price adjustment protections to allow changes in market prices of key raw materials to be passed on to the customer. Such price protections are not always obtained, however, and some raw material price risk remains significant.

 

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

 

Our immediate recognition of derivative instrument gains and losses can cause net income to be volatile from period to period due to the timing of the change in value of the derivative instruments relative to the volume of biofuel being sold. As of June 30, 2015 and December 31, 2014, the fair values of our derivative instruments were a net liability in the amount of $5,353,000 and a net asset of $68,000, 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.

 

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 six months of 2015. We included only those raw materials and conversion costs for which a hypothetical adverse change in price would result in a 1% or greater decrease in gross profit. Assuming that the prices of the associated finished goods could not be increased and assuming no change in quantities sold, a hypothetical 10% change in the average price of the commodity listed below would result in the following change in gross profit.

 

 
26

 

 

(Volume and dollars in thousands)

 

Item

 

Volume

Requirements (a)

 

Units

 

Hypothetical Adverse Change in Price

   

Decrease in Gross Profit

   

Percentage Decrease in Gross Profit

 
                                   

Crude corn oil and yellow grease

    131,869  

LB

    10%     $ 3,653       19.4 %

Petrofuels

    9,167  

GAL

    10%     $ 1,706       9.0 %

Methanol

    50,607  

LB

    10%     $ 962       5.1 %

Electricity

    50  

MWH

    10%     $ 282       1.5 %

Natural Gas

    673  

MCF

    10%     $ 220       1.2 %

Coal

    24  

Ton

    10%     $ 194       1.0 %

Sodium methylate

    4461  

LB

    10%     $ 189       1.0 %

 

(a)

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

 

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

 

 
27

 

 

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 June 30, 2015 were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

 

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

 

 
28

 

 

PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

 

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

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.  

 

None.

 

 
29

 

 

Item 6. Exhibits.

 

Exhibit

Description

10.3

Amendment to Commodity Trading Advisor Agreement dated as of June 1, 2015 between FutureFuel Ch