FutureFuel(FF) - 2020 Q4 - Annual Report

Part I Business FutureFuel Corp. operates in chemicals and biofuels, with biofuels contributing 61% of 2020 revenue, influenced by incentives and competition, while chemicals face contract declines - The company's business is managed in two segments: chemicals (custom manufacturing and performance chemicals) and biofuels. The chemicals segment focuses on specialty chemicals for specific customers and multi-customer performance chemicals, while the biofuels segment primarily produces and sells biodiesel[14][21] - In 2020, the company distributed quarterly cash dividends of $0.06 per share and a special dividend of $3.00 per share. Quarterly dividends of $0.06 per share have also been declared for 2021[13] 2020 Revenue Breakdown by Segment | Segment | Percentage of Revenue | | :--- | :--- | | Biofuels | 61% | | Custom Manufacturing | 31% | | Performance Chemicals | 8% | Biofuels Business Segment The biofuels segment produces biodiesel, influenced by RFS2 and BTC, facing competition from renewable diesel and feedstock volatility - The one dollar per gallon Blenders' Tax Credit (BTC) was retroactively reinstated in late December 2019, covering the period from January 1, 2018, through December 31, 2022[37] - Renewable diesel is a rapidly growing competitor to biodiesel, trading at a premium due to its compatibility with existing petrodiesel infrastructure and better cold-weather performance. A significant capital investment would be required for FutureFuel to enter this market[57][60] - In 2020, one customer accounted for approximately 20% of biofuel revenue (12% of total revenue). The company does not have long-term contracts with biofuel customers, instead selling via short-term purchase orders at market rates[55] Finalized RFS2 Renewable Fuel Volumes | Fuel Type | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Cellulosic biofuel (million gallons) | 418 | 593 | n/a | | Biomass-based diesel (billion gallons) | 2.10 | 2.43 | 2.43 | | Advanced biofuel (billion gallons) | 4.92 | 5.09 | n/a | | Renewable fuel (billion gallons) | 19.92 | 20.09 | n/a | Chemicals Business Segment The chemicals segment, comprising custom manufacturing and performance chemicals, faces declining legacy product demand and intensifying international competition - Demand for a key laundry detergent additive has ceased, and the customer will not require further production after 2020[75] - A significant chemical customer did not renew two product contracts at the end of 2019 and 2020, respectively. These contracts represented a combined 14% of total revenue in 2019 and 13% in 2018[76] - Competition in the specialty chemicals market has intensified, primarily from manufacturers in India and China. FutureFuel competes based on price, customer service, technology, quality, and reliability[77] Intellectual Property, R&D, and Environmental Matters The company protects IP, invests in R&D for biofuels and chemicals, and manages significant environmental compliance costs under stringent regulations - The company's operations are subject to numerous complex environmental laws, including CERCLA, RCRA, the Clean Water Act, and the Clean Air Act, which can impose significant compliance costs and liability for contamination[87][89][90][92][93] Research & Development Expense | Year | Expense (in thousands) | | :--- | :--- | | 2020 | $2,988 | | 2019 | $3,191 | | 2018 | $3,524 | Environmental Protection Expenditures | Year | Expenditures (in thousands) | | :--- | :--- | | 2020 | $10,057 | | 2019 | $10,024 | | 2018 | $10,940 | Risk Factors The company faces significant risks from economic conditions, COVID-19, reliance on government incentives, intense competition, customer concentration, and environmental regulations - The business is significantly affected by the COVID-19 pandemic, which could negatively impact raw material sourcing, product demand, and supply chain operations[110][111][112] - The biomass-based diesel industry relies heavily on government incentives, particularly the Blenders' Tax Credit (BTC). The BTC is set to expire after December 31, 2022, and there is no guarantee it will be reinstated, which would materially harm the business[114][115][116] - The company faces intense competition from other biodiesel producers, foreign imports, and rapidly growing renewable diesel, which has advantages in blending and transportation. U.S. biodiesel production capacity also exceeds the federal mandate, which could pressure prices[125][128][129] - The business is reliant on a small number of customers. The chemicals segment has five large customers representing over 70% of its sales, while the biofuels segment had one customer accounting for 12% of total 2020 revenue[150][151] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[207] Properties The company's primary asset is a well-maintained, owned manufacturing plant in Batesville, Arkansas, with sufficient capacity for current needs - The company's main asset is a manufacturing plant on a 2,200-acre site in Batesville, Arkansas, which is owned by its subsidiary, FutureFuel Chemical Company[208] Legal Proceedings The company is not involved in any material pending legal proceedings beyond routine business litigation - The company is not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to its business[209] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[211] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with 43.7 million shares outstanding, and it paid regular and special dividends in 2020 - The company's common stock is traded on the NYSE under the symbol "FF", with 43,743,243 shares outstanding as of March 16, 2021[215] - The company paid regular cash dividends in 2020 and 2019, a special dividend in 2020, and has declared dividends for 2021. Future dividends are not guaranteed[217] Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Securities to be issued upon exercise of outstanding options (a) | Weighted-average exercise price of outstanding options (b) | Securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 44,000 | $12.73 | 4,330,167 | Selected Financial Data This section provides a five-year summary of the company's key historical financial data, including revenue, net income, and cash flows Selected Financial Data (2018-2020) | Item (in thousands, except per share) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Operating Revenue | $204,505 | $205,226 | $291,018 | | Net income | $46,564 | $88,181 | $53,158 | | Diluted EPS | $1.06 | $2.02 | $1.22 | | Total Assets | $441,304 | $586,505 | $471,155 | | Dividends declared per share | $3.24 | $0.24 | $0.24 | | Net cash from operating activities | $96,403 | $34,638 | $85,613 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance, highlighting flat 2020 revenue, decreased net income due to a 2019 tax credit, and strong liquidity despite segment challenges - The significant decrease in 2020 gross profit was primarily due to a $31.3 million benefit recognized in 2019 from the retroactive reinstatement of the 2018 biodiesel BTC, lower biodiesel margins, and reduced chemical sales volumes due to COVID-19 and an expired contract[261] - The 2020 effective tax rate was positively impacted by the CARES Act, which allowed the company to carry back 2019 and 2020 net operating losses to years with a higher 35% tax rate, resulting in a significant tax benefit[265] - Cash from operating activities increased to $96.4 million in 2020 from $34.6 million in 2019, mainly due to a large decrease in accounts receivable which had been inflated in 2019 by the BTC receivable[309] Financial Summary: 2020 vs. 2019 (in thousands) | Metric | 2020 | 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $204,505 | $205,226 | $(721) | (0.4%) | | Income from operations | $22,339 | $65,309 | $(42,970) | (65.8%) | | Net income | $46,564 | $88,181 | $(41,617) | (47.2%) | | Adjusted EBITDA | $29,157 | $78,697 | $(49,540) | (63.0%) | Quantitative and Qualitative Disclosures About Market Risk The company faces significant market risk from commodity price fluctuations, particularly in biofuels, with a 10% adverse feedstock price change impacting gross profit by 38.8% - The company uses exchange-traded commodity futures and options to manage price risk in its biofuels business, but these instruments do not qualify for hedge accounting treatment[342] Gross Profit Sensitivity to 10% Adverse Price Change in Key Commodities | Item | Decrease in Gross Profit ($ thousands) | Percentage Decrease in Gross Profit | | :--- | :--- | :--- | | Biodiesel feedstocks | $12,162 | 38.8% | | Methanol | $1,020 | 3.3% | | Electricity | $534 | 1.7% | | Sodium Methylate | $418 | 1.3% | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and independent auditor reports for 2018-2020, along with detailed notes on accounting policies - The report includes an unqualified opinion on the financial statements for the years ended December 31, 2020 and 2019 from the independent auditor, RSM US LLP[353] - A critical audit matter identified was the recognition of $8.35 million in other income related to the legal resolution of a contractual matter, which required significant management judgment[358] - The retroactive reinstatement of the Blenders' Tax Credit (BTC) in December 2019 resulted in the company recognizing a gross profit of $57.9 million in its 2019 financial results, covering both the 2018 and 2019 periods[429] - As of December 31, 2020, the company expects to recognize approximately $21.7 million of revenue in the future from remaining performance obligations under its long-term contracts, with about 17% expected in the next 12 months[442] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no disagreements with its principal accountants regarding accounting principles, financial disclosure, or auditing procedures - There were no disagreements with the company's accountants, RSM US LLP or RubinBrown LLP, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure[554] Controls and Procedures Management and auditors concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that as of December 31, 2020, the company's internal control over financial reporting was effective based on the COSO framework[558] - The independent registered public accounting firm, RSM US LLP, audited the effectiveness of the company's internal control over financial reporting as of December 31, 2020, and issued an unqualified opinion[559][563] Other Information The company confirms no required Form 8-K disclosures were omitted during the fourth quarter of 2020 - No information required to be disclosed in a report on Form 8-K was omitted during the fourth quarter of 2020[571] Part III Directors, Executive Officers, and Corporate Governance This section identifies directors and executive officers, outlines corporate governance structures, and confirms the independence and expertise of the audit committee - The company's directors and executive officers are identified, including Chairman and CEO Paul A. Novelly, COO Thomas McKinlay, and CFO Rose M. Sparks[575][576] - The company has adopted a code of business conduct and ethics, which is available on its website[606] - The Board of Directors has determined that each member of its audit committee is an audit committee financial expert and is independent[610] Executive Compensation This section details executive compensation, including base salary, bonuses, and equity awards, noting the CEO received no direct compensation in 2020 - Directors receive an annual stipend of $30,000, with committee chairs receiving an additional $10,000. They also receive fees for meeting attendance ($2,000 for in-person, $1,000 for telephonic)[612] - The company's pay ratio of its Principal Executive Officer (PEO) to the median employee was zero, as the PEO, Paul A. Novelly, received no compensation from the company[665] 2020 Summary Compensation (in thousands) | Name | Position | Salary | Bonus | Option Awards | All Other | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Paul A. Novelly | Chairman & CEO | $0 | $0 | $0 | $0 | $0 | | Rose M. Sparks | CFO | $183 | $95 | $0 | $54 | $332 | | Paul M. Flynn (retired) | EVP | $226 | $69 | $0 | $40 | $335 | | Tom McKinlay | COO | $287 | $95 | $49 | $22 | $446 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership of common stock, with Chairman Paul A. Novelly holding 40.5% and institutional investors holding significant stakes - As of the report date, all directors and executive officers as a group beneficially owned 18,132,106 shares, representing 41.5% of the outstanding common stock[677] Security Ownership of Certain Beneficial Owners (>5%) | Name of Beneficial Owner | Amount of Beneficial Ownership | Percent of Common Stock | | :--- | :--- | :--- | | Paul A. Novelly | 17,725,100 | 40.5% | | BlackRock, Inc. | 4,043,313 | 9.2% | | Dimensional Fund Advisors LP | 2,811,492 | 6.4% | | The Vanguard Group | 2,726,360 | 6.2% | | Renaissance Technologies LLC | 2,263,800 | 5.2% | Certain Relationships and Related Transactions, and Director Independence The company conducts market-priced transactions with related parties, subject to disinterested board approval, and maintains a majority of independent directors - The company conducts transactions with Apex Oil Company, Inc. and its affiliates for buying and selling biofuels, petroleum products, and natural gas, and for administrative services. These transactions are priced at market rates[685] - The company has a formal policy requiring that any related party transaction exceeding $120,000 be approved by a majority of disinterested directors as fair to the company and its shareholders[686] - The Board of Directors has determined that seven of its members are independent under SEC and NYSE rules: Edwin A. Levy, Donald C. Bedell, Paul M. Manheim, Terrance C.Z. Egger, Dale E. Cole, Jeffrey L. Schwartz, and Alain J. Louvel[688] Principal Accountant Fees and Services This section details fees paid to the principal accountant, RSM US LLP, for 2019-2020 services, all pre-approved by the audit committee - The audit committee pre-approves all audit and permissible non-audit services provided by the independent auditors[695] Accountant Fees (in thousands) | Fee Type | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $354 | $296 | | Audit-Related Fees | $12 | $12 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | Part IV Exhibits and Financial Statement Schedules This section lists all financial statements and exhibits filed with the Form 10-K, including governance documents and material contracts - Lists the financial statements filed with the report and provides a list of all exhibits required by Item 601 of Regulation S-K, including governance documents, material contracts, and certifications[700][701] Form 10-K Summary The company has elected not to include a summary of information required by Form 10-K under this item - The Company has elected not to include a summary of information required by Form 10-K under this Item 16[703]