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FF > SEC Filings for FF > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for FUTUREFUEL CORP.


7-May-2013

Quarterly Report


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.

      Liquidity and Capital Resources

Our net cash provided by (used in) operating activities, investing activities,
and financing activities for the three months ended March 31, 2013 and 2012 are
set forth in the following chart.

                             (Dollars in thousands)

                                                       March 31,      March 31,
                                                         2013            2012
Net cash (used in)/provided by operating activities   $    (7,335 )   $   13,983
Net cash used in investing activities                 $    (3,716 )   $  (10,790 )
Net cash provided by/(used in) financing activities   $    14,525     $   (4,052 )

Operating Activities

Cash from operating activities decreased from $13,983,000 of cash provided by operating activities in the first three months of 2012 to a net $7,335,000 of cash used in operating activities in the first three months of 2013. This decrease was primarily attributable to an increase in our accounts receivable, including accounts receivable from related parties, and an increase in inventory balances. In the first three months of 2012, accounts receivable, including accounts receivable from related parties, increased cash provided by operating activities by $13,560,000. In the first three months of 2013, accounts receivable, including accounts receivable from related parties, decreased cash from operating activities by $9,606,000. The increase in accounts receivable balances in 2013 was primarily related to the timing and amount of sales made on a common carrier pipeline. In the first three months of 2012, changes in inventory carrying values decreased cash provided from operating activities by $10,513,000. In the first three months of 2013, changes in inventory carrying values decreased cash from operating activities by $28,710,000. The increase in inventory carrying value in the first three months of 2013 is primarily due to increased purchases of biodiesel feedstock and from the timing and amount of purchases made on a common carrier pipeline. Partially offsetting these decreases to cash from operating activities is an increase in accounts payable, including accounts payable to related parties, an increase in our net income, and an increase in income taxes payable. In the first three months of 2012, changes in accounts payable, including accounts payable to related parties, increased cash from operating activities by $82,000. In the first three months of 2013, changes in accounts payable, including accounts payable to related parties, increased cash from operating activities by $9,191,000. This increase is primarily due to the timing and amount of payments to venders and suppliers. Net income in the first three months of 2012 totaled $7,113,000, while in the first three months of 2013 net income totaled $14,050,000. See the below discussion for the reasons for this change in net income for the periods presented. Changes in our income taxes payable increased cash provided by operating activities by $3,198,000 in the first three months of 2012. Such changes increased cash from operating activities by $4,288,000 in the first three months of 2013. This difference is due to the timing and amount of estimated income tax payments made.


Investing Activities

Cash used in investing activities decreased from $10,790,000 in the first three months of 2012 to $3,716,000 in the first three months of 2013. This decrease was primarily the result of a reduction in the net purchases of marketable securities in the first three months of 2013 compared to the first three months of 2012. Such net purchases totaled $9,758,000 in the first three months of 2012 and totaled $207,000 of net sales in the first three months of 2013. Our capital expenditures and customer reimbursements for capital expenditures are summarized in the following table:

(Dollars in thousands)

                                                            Three Months
                                                                Ended           Three Months
                                                              March 31,            Ended
                                                                2013           March 31, 2012
Cash paid for capital expenditures                          $       2,318     $          2,113
Cash received as reimbursement of capital expenditures             (1,057 )               (157 )
Cash paid, net of reimbursement, for capital expenditures   $       1,261     $          1,956

Financing Activities

Cash from financing activities increased from $4,052,000 of cash used in financing activities for the first three months of 2012 to $14,525,000 of cash provided by financing activities in the first three months of 2013. This change is primarily the result of an increase in proceeds from the issuance of stock. In the first three months of 2012 no shares of FutureFuel common stock were sold under its at-the-market offering. In the first three 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.

On February 6, 2013, FutureFuel announced the completion of the sale of shares under the at-the-market offering. FutureFuel sold an aggregate 3,000,000 shares in open market trading for aggregate gross proceeds of $37,247,000, resulting in net proceeds of $36,127,000 after deducting commissions and fees.

Credit Facility

We entered into a $50 million credit agreement with a commercial bank in March 2007. 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, 2013. 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 less than 3:1. We had no borrowings under this credit agreement at March 31, 2013 or December 31, 2012.

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 quarter 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 the first quarter of 2012, we paid a regular cash dividend in the amount of $0.10 per share on our common stock. The regular cash dividend amounted to $4,132,000.

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. Additional, regular cash dividends will be paid in 2013, 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 first quarter of 2013 and 2012, we also had investments in certain preferred stock, trust preferred securities, auction rate securities, 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, auction rate, and other equity instruments totaled $96,352,000 and $87,768,000 at March 31, 2013 and December 31, 2012, respectively.

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

Results of Operations

In General

We break our chemicals business into two main product groups: custom manufacturing and performance chemicals. Custom manufacturing consists of products made for specific customers based upon specifications provided by such customers. Major products in the custom manufacturing group include:
(i) nonanoyloxybenzene-sulfonate (or NOBS), a bleach activator manufactured for The Procter & Gamble Company for use in a household detergent; (ii) a proprietary herbicide (and intermediates) manufactured exclusively for a customer; (iii) chlorinated polyolefin adhesion promoters (or CPOs) and antioxidant precursors (or DIPB) for a customer; and (iv) a biocide intermediate for another customer. The custom manufacturing group also includes agrochemicals as well as industrial and consumer products (cosmetics and personal care products, specialty polymer, photographic and imaging chemicals, and an intermediate anode powder).

Revenues generated from the bleach activator are based on a supply agreement with the customer. The supply agreement stipulates selling price per kilogram based on volume sold, with price moving up as volumes move down, and vice-versa. On August 28, 2012, we signed an amendment to our existing agreement with the bleach activator customer. Among other things, the amendment:
(i) extended the term of the agreement to December 31, 2016 (unless terminated earlier in accordance with the provisions of the agreement); and (ii) allows us to sell certain formulations of the bleach activator to third parties as a performance chemical. We pay for raw materials required to produce the bleach activator. The contract with the customer provides that the price received by us for the bleach activator is indexed to changes in certain items, enabling us to pass along most inflationary increases in production costs to the customer. Revenue from the bleach activator for the three months ended March 31, 2013 increased by 1% from revenues for the three months ended March 31, 2012. Annual 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 (and our predecessor at our Batesville plant) have been the primary manufacturer of a proprietary herbicide and certain intermediates for a customer (and its predecessors) since approximately 1993. However, in recent years, these products have faced generic competition, from other suppliers to our customer, from others who compete with our customer for the sale of herbicides, and from other agricultural chemicals present in the market place. In response to its perceptions of this competition, in 2011 the customer initiated discussions with us to reduce volume and alter other terms of the contracts. Sales volumes of these products have declined. Being of the opinion that the current contracts do not adequately provide a framework to support our mutual efforts, we exercised our rights to terminate these contracts, effective September 1, 2013 for the proprietary herbicide and October 1, 2013 for the intermediates. We anticipate that we will continue to do business with our customer after those dates provided we can reach mutually acceptable terms. No assurances can be given, however, that such mutually acceptable terms will be reached.

The bleach activator and proprietary herbicide customers represented approximately 22% of our revenues for the three months ended March 31, 2013. We believe that the loss of these two companies as customers would have a material adverse effect on us.

In 2008, we entered into a contract with a new customer for the toll manufacture of an industrial intermediate utilized in the antimicrobial industry. We invested approximately $10 million in capital expenditures to modify and expand our plant to produce this industrial intermediate. The customer reimbursed these expenditures, which reimbursements have been classified as deferred revenue on our balance sheet and will be earned into income over the expected life of the product. The contract stipulates a price curve based on volumes sold and has an inflationary pricing provision whereby we pass along most inflationary changes in production costs to the customer.


Pricing for the other custom manufacturing products is negotiated directly with the customer. Some, but not all, of these products have pricing mechanisms and/or protections against raw material or conversion cost changes.

Performance chemicals consist of specialty chemicals that are manufactured to general market-determined specifications and are sold to a broad customer base. The major product line in the performance chemicals group is SSIPA/LiSIPA, polymer modifiers that improve the properties of nylon fiber. This group of products also includes sulfonated monomers, specialty solvents, polymer additives, and chemical intermediates.

SSIPA/LiSIPA revenues are generated from a diverse customer base of nylon fiber manufacturers and other customers that produce condensation polymers. Contract sales are, in certain instances, indexed to key raw materials for inflation; otherwise, there is no pricing mechanism or specific protection against raw material or conversion cost changes.

Pricing for the other performance chemical products is established based upon competitive market conditions. Some, but not all, of these products have pricing mechanisms and/or specific protections against raw material or conversion cost changes.

For our biofuels segment, we procure all of our own feedstock and only sell biodiesel for our own account. We have the capability to process multiple types of vegetable oils and animal fats. We can receive feedstock by rail or truck, and have substantial storage capacity to acquire feedstock at advantaged prices when market conditions permit. In 2010, we redesigned our continuous line to produce biodiesel from feedstock with high free fatty acids. Annual capacity is in excess of 45 million gallons of biodiesel per year.

There currently is uncertainty as to whether we will produce biodiesel in the future. This uncertainty results from: (i) changes in feedstock prices relative to biodiesel prices; and (ii) the permanency of government mandates and tax credits, including the $1.00 per gallon biodiesel blenders credit set to expire at December 31, 2013. See "Risk Factors" contained in our Form 10-K for the year ended December 31, 2012 filed with the SEC on March 18, 2013. A copy can also be obtained at our website at http://ir.futurefuelcorporation.com/sec.cfm.

While biodiesel is the principal component of the biofuels segment, we also generate revenue from the sale of petrodiesel both in blends with our biodiesel and with no biodiesel added. Petrodiesel and biodiesel blends are available to customers at our Batesville plant, at leased storage facilities, and through a network of remotely operated tanks. In addition, we deliver blended product to a small group of customers within our region. We also sell refined petroleum products on common carrier pipelines in part to maintain our status as a shipper on the pipeline.

The majority of our expenses are cost of goods sold. Cost of goods sold include raw material costs as well as both fixed and variable conversion costs, conversion costs being those expenses that are directly or indirectly related to the operation of our plant. Significant conversion costs include labor, benefits, energy, supplies, depreciation, and maintenance and repair. In addition to raw material and conversion costs, cost of goods sold includes environmental reserves and costs related to idle capacity. Finally, cost of goods sold includes hedging gains and losses recognized by us related to our biofuels segment. Cost of goods sold is allocated to the chemicals and biofuels business segments based on equipment and resource usage for most conversion costs and based on revenues for most other costs.

Operating costs include selling, general and administrative, and research and development expenses.

The discussion of results of operations that follows is based on revenues and expenses in total and for individual product lines and do not differentiate related party transactions.


Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

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

              (Dollars in thousands other than per share amounts)

                                                        Three Months
                                      Three Months         Ended
                                      Ended March           March
                                        31, 2013          31, 2012        Dollar Change       % Change
Revenues                              $      92,165     $     85,727     $         6,438             7.5 %
Income from operations                $      18,950     $     10,583     $         8,367            79.1 %
Net income                            $      14,050     $      7,113     $         6,937            97.5 %
Earnings per common share - basic     $        0.33     $       0.17     $          0.16            94.1 %
Earnings per common share - diluted   $        0.33     $       0.17     $          0.16            94.1 %
Capital expenditures (net of
reimbursements)                       $       1,261     $      1,956     $          (695 )         (35.5 %)
Adjusted EBITDA                       $      17,734     $     16,584     $         1,150             6.9 %

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, 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.

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.


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

(Dollars in thousands)

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