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, 2014and 2013 are set forth in the following chart. (Dollars in thousands) March 31, March 31, 20142013
Net cash provided by/(used in) operating activities
$ (11,406 )$
(3,716 ) Net cash (used in)/provided by financing activities
Operating Activities Cash from operating activities increased from
$7,335,000of cash used in operating activities in the first three months of 2013 to $31,458,000of cash provided by operating activities in the first three months of 2014. This increase was primarily attributable to a larger decrease in our accounts receivable, including accounts receivable from related parties, and lower increase in inventory balances for the first three months of 2014 as compared to the first three months of 2013. In the first three months of 2014, accounts receivable, including accounts receivable from related parties, increased cash provided by operating activities by $11,751,000. 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 decrease in accounts receivable balances in 2014 was primarily related to the timing and amount of sales made on a common carrier pipeline. In the first three months of 2013, changes in inventory carrying values decreased cash provided from operating activities by $28,710,000. In the first three months of 2014, changes in inventory carrying values decreased cash from operating activities by $319,000. The smaller increase in the inventory carrying value in the first three months of 2014 is primarily due to decreased purchases of biodiesel feedstock and from the timing and amount of purchases made on a common carrier pipeline. Partially offsetting these increases to cash from operating activities was a smaller increase in accounts payable, including accounts payable to related parties and a decrease in our net income for the first three months of 2014 as compared to the first three months of 2013. 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. In the first three months of 2014, changes in accounts payable, including accounts payable to related parties, increased cash from operating activities by $5,666,000. This smaller increase was primarily due to the timing and amount of payments to vendors and suppliers. Net income in the first three months of 2013 totaled $14,050,000, while in the first three months of 2014 net income totaled $6,274,000. See the below discussion for the reasons for this change in net income for the periods presented. Investing Activities Cash used in investing activities increased from $3,716,000in the first three months of 2013 to $11,406,000in the first three months of 2014. This increase was primarily the result of an increase in the net purchases of marketable securities in the first three months of 2014 compared to the first three months of 2013. Such net purchases totaled $7,289,000in the first three months of 2014 and totaled $207,000of 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 Three Months Ended Ended March 31, 2014 March 31, 2013 Cash paid for capital expenditures $ 2,682 $ 2,318 Cash received as reimbursement of capital expenditures (204 ) (1,057 )
Cash paid, net of reimbursement, for capital expenditures $ 2,478 $ 1,261
Financing Activities Cash from financing activities decreased from
$14,525,000of cash provided by financing activities for the first three months of 2013 to $5,211,000of cash used by financing activities in the first three months of 2014. This change is primarily the result of a decrease in proceeds from the issuance of stock. In the first three months of 2013, 1,594,872 shares of FutureFuel'scommon stock were sold under its at-the-market offering, generating $19,292,000in net proceeds which completed the at-the-market offering. No new offering existed in the first three months of 2014. Credit Facility We renewed a $50 millioncredit agreement with a commercial bank effective June 30, 2013. The loan is a revolving facility the proceeds of which may be used for our working capital, capital expenditures, and general corporate purposes. The facility terminates on June 30, 2018. Advances are made pursuant to a borrowing base. Advances are secured by a perfected first priority security interest in our accounts receivable and inventory. The interest rate floats at certain margins over LIBORor base rate based upon the leverage ratio from time to time. There is an unused commitment fee. The ratio of total funded debt to EBITDA may not be more than 3:1. We had no borrowings under this credit agreement at March 31, 2014or December 31, 2013. We intend to fund future capital requirements for our businesses from cash flow generated by us as well as from existing cash, cash investments, and, if the need should arise, borrowings under our credit facility. We do not believe there will be a need to issue any securities to fund such capital requirements. Dividends
In the first quarter of 2014, we paid a regular cash dividend in the amount of
In the first quarter of 2013, we paid a regular cash dividend in the amount of
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 2014, as previously reported. Third parties have not placed significant restrictions on our working capital management decisions. A significant portion of these funds were held in cash or cash equivalents at multiple financial institutions. In the periods ended
March 31, 2014and December 31, 2013, we also had investments in certain preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments. We classify these investments as current assets in the accompanying consolidated balance sheets and designate them as being "available-for-sale". Accordingly, they are recorded at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders' equity. The fair value of these preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments totaled $110,270,000and $104,271,000at March 31, 2014and December 31, 2013, 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) two proprietary herbicides and associated intermediates manufactured exclusively for two customers; (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, and a specialty polymer). Revenues generated from the bleach activator are based on a supply agreement with the customer that expires
December 31, 2016(unless terminated earlier in accordance with the provisions of the agreement). The supply agreement stipulates selling price per kilogram based on volume sold, with price moving up as volumes move down, and vice-versa, on an annual basis. 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, 2014decreased by 23% from revenues for the three months ended March 31, 2013. The majority of the decrease was from reduced sales volume. 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) were the primary manufacturer of a proprietary herbicide and certain intermediates for a customer (and its predecessors) since approximately 1992 until the contract ended in September 2013. We now sell to this customer on a revised toll manufacturing, purchase order, basis. In the three months ended March 31, 2014, we began selling another herbicide intermediate to a new customer. The contract with the new customer is effective through December 31, 2016(unless terminated earlier in accordance with the provisions of the agreement). No assurances can be given, however, that the agreement will be extended past 2016. Combined revenues from these two customers in the first three months of 2014 decreased 62% from revenues recognized on the original proprietary herbicide for the first three months of 2013. The majority of this decrease related to reduced sales volumes of the original proprietary herbicide intermediate.
The bleach activator and the two proprietary herbicide and associated intermediate customers represented approximately 16% of our revenues for the three months ended
With respect to other custom manufacturing products, we toll manufacture an industrial intermediate utilized in the antimicrobial industry under a contract that 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. 15
-------------------------------------------------------------------------------- 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, animal fats, and separated food waste oils. We can receive feedstock by rail or truck, and have substantial storage capacity to acquire feedstock at advantaged prices when market conditions permit. Annual capacity is in excess of 58 million gallons of biodiesel per year. There currently is uncertainty as to the level at which we will produce and sell biodiesel in the future. This uncertainty results from: (i) changes in feedstock prices relative to biodiesel prices; and (ii) the presence or absence of government mandates and tax credits, including the
$1.00per gallon biodiesel blenders credit which expired December 31, 2013and is currently before Congressfor renewal. See "Risk Factors" contained in our Form 10-K for the year ended December 31, 2013filed with the SECon March 17, 2014. 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 does not differentiate related party transactions. 16
Three Months Ended
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 31, March 31, 2014 2013 Dollar Change % Change Revenues
$ 82,197 $ 92,165 $ (9,968 )(11 )% Income from operations $ 7,451 $ 18,950 $ (11,499 )(61 )% Net income $ 6,274 $ 14,050 $ (7,776 )(55 )%
Earnings per common share - basic
(0.19 ) (58 )%
Earnings per common share - diluted
(0.19 ) (58 )% Capital expenditures (net of reimbursements)
$ 2,478 $ 1,261$ 1,217 97 % Adjusted EBITDA $ 10,108 $ 17,734 $ (7,626 )(43 )% 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 $1.00biodiesel 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. 17 --------------------------------------------------------------------------------
The following table reconciles adjusted EBITDA with net income, the most directly comparable GAAP performance financial measure.
(Dollars in thousands)