The
accompanying notes are an integral part of these financial
statements.
Notes
to Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
(Unaudited)
1) Nature
of operations and basis of presentation
Viceroy
Acquisition Corporation
Viceroy
Acquisition Corporation (“Viceroy”) was incorporated under the laws of the state
of Delaware on August 12, 2005 to serve as a vehicle for the acquisition by
way of asset acquisition, merger, capital stock exchange, share purchase or
similar transaction (“Business Combination”) of one or more operating businesses
in the oil and gas industry. On July 12, 2006, Viceroy completed
an equity offering.
On
July 21, 2006, Viceroy entered into an acquisition agreement with Eastman
Chemical Company (“Eastman Chemical”) to purchase all of the issued and
outstanding stock of Eastman SE, Inc. (“Eastman SE”). On
October 27, 2006, a special meeting of the shareholders of Viceroy was held
and the acquisition of Eastman SE was approved by the
shareholders. On October 31, 2006, Viceroy acquired all of the
issued and outstanding shares of Eastman SE from Eastman
Chemical. Immediately subsequent to the acquisition, Viceroy changed
its name to FutureFuel Corp. (“FutureFuel”) and Eastman SE changed its name to
FutureFuel Chemical Company (“FutureFuel Chemical”).
Eastman
SE, Inc.
Eastman
SE was incorporated under the laws of the state of Delaware on September 1,
2005 and subsequent thereto operated as a wholly-owned subsidiary of Eastman
Chemical through October 31, 2006. Eastman SE was incorporated
for purposes of effecting a sale of Eastman Chemical’s manufacturing facility in
Batesville, Arkansas (the “Batesville Plant”). Commencing
January 1, 2006, Eastman Chemical began transferring the assets associated
with the business of the Batesville Plant to Eastman SE.
The
Batesville Plant was constructed to produce proprietary photographic chemicals
for Eastman Kodak Company (“Eastman Kodak”). Over the years, Eastman
Kodak shifted the plant’s focus away from the photographic imaging business to
the custom synthesis of fine chemicals and organic chemical intermediates used
in a variety of end markets, including paints and coatings, plastics and
polymers, pharmaceuticals, food supplements, household detergents and
agricultural products.
In 2005,
the Batesville Plant began the implementation of a biobased products
platform. This includes the production of biofuels (biodiesel,
bioethanol and lignin/biomass solid fuels) and biobased specialty chemical
products (biobased solvents, chemicals and intermediates). In
addition to biobased products, the Batesville Plant continues to manufacture
fine chemicals and other organic chemicals.
The
accompanying consolidated financial statements have been prepared by FutureFuel
in accordance and consistent with the accounting policies stated in FutureFuel’s
2006 audited financial statements and should be read in conjunction with the
2006 audited consolidated financial statements of FutureFuel. Certain
prior year balances have been reclassified to conform with the current year
presentation.
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 are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States and, of necessity, include some 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 subsidiary, FutureFuel
Chemical. Intercompany transactions and balances have been eliminated
in consolidation.
Notes
to Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
(Unaudited)
2) Inventories
The
carrying values of inventory were as follows as of:
|
|
|
September 30,
2007
|
|
|
December
31, 2006
|
|
|
At
first-in, first-out or average cost (approximates current
cost)
|
|
|
|
|
|
|
|
Finished goods
|
|
$ |
8,049 |
|
|
$ |
7,943 |
|
|
Work-in-process
|
|
|
884 |
|
|
|
1,750 |
|
|
Raw materials and
supplies
|
|
|
16,703 |
|
|
|
12,894 |
|
|
|
|
|
25,636 |
|
|
|
22,587 |
|
|
LIFO reserve
|
|
|
(70 |
) |
|
|
(5 |
) |
|
Total inventories
|
|
$ |
25,566 |
|
|
$ |
22,582 |
|
3) Derivative
instruments
The
volumes and carrying values of FutureFuel’s derivative instruments were as
follows at:
|
|
|
Asset/(Liability)
|
|
|
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
|
Quantity
(000
bbls) Long/
(Short)
|
|
|
Fair
Market Value
|
|
|
Quantity
(000
bbls) Long/
(Short)
|
|
|
Fair
Market Value
|
|
|
Regulated
fixed price future commitments, included in other current
assets
|
|
|
67 |
|
|
$ |
(1,075 |
) |
|
|
(250 |
) |
|
$ |
(28 |
) |
|
Regulated
options, included in other current assets
|
|
|
(250 |
) |
|
$ |
(467 |
) |
|
|
(100 |
) |
|
$ |
(419 |
) |
The
margin account maintained with a broker to collateralize these derivative
instruments carried an account balance of $2,209 and $3,578 at
September 30, 2007 and December 31, 2006, and is classified as other
current assets in the consolidated balance sheet. The carrying values
of the margin account and of the derivative instruments are included in other
current assets.
4) Marketable
debt securities
In
September 2007, FutureFuel made an investment in certain U.S. treasury bills and
notes. These marketable debt securities have maturities ranging from
March 2008 to August 2009. FutureFuel anticipates these securities
being sold within one year, regardless of the maturity date, and has therefore
classified all marketable debt securities as current assets in the accompanying
consolidated balance sheet. FutureFuel has designated these
securities as being available-for-sale. Accordingly, these securities
are carried at fair value, with the unrealized gains and losses, net of taxes,
reported as a component of stockholders’ equity. No realized gains or
losses have been incurred related to these securities through September 30,
2007.
The fair
market value of these marketable debt securities totaled $14,831 and $0 at
September 30, 2007 and December 31, 2006, respectively.
Notes
to Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
(Unaudited)
5) Accrued
expenses and other current liabilities
Accrued
expenses and other current liabilities, including those associated with related
parties, consisted of the following at:
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
|
Accrued
employee liabilities
|
|
$ |
455 |
|
|
$ |
773 |
|
|
Accrued
property, use and franchise taxes
|
|
|
873 |
|
|
|
373 |
|
|
Accrued
professional fees
|
|
|
100 |
|
|
|
340 |
|
|
Amounts
collected on behalf of Eastman Chemical
|
|
|
20 |
|
|
|
178 |
|
|
Other
|
|
|
397 |
|
|
|
93 |
|
|
|
|
$ |
1,845 |
|
|
$ |
1,757 |
|
6) Borrowings
In March
2007 FutureFuel Chemical entered into a $50 million credit agreement with a
commercial bank. The loan is a revolving facility the proceeds of
which may be used for working capital, capital expenditures and the general
corporate purposes of FutureFuel Chemical. The facility terminates in
March 2010. Advances are made pursuant to a borrowing base comprised
of 85% of eligible accounts plus 60% of eligible direct inventory plus 50% of
eligible indirect inventory. Advances are secured by a perfected
first priority security interest in accounts receivable and
inventory. The interest rate floats at the following margins over the
London Interbank Offered Rate (“LIBOR”) or base rate based upon the leverage
ratio from time to time.
|
Leverage
Ratio
|
|
Base
Rate
Margin
|
|
LIBOR
Margin
|
|
>
3
|
|
-0.55%
|
|
1.70%
|
|
≥ 2 < 3
|
|
-0.70%
|
|
1.55%
|
|
≥ 1 < 2
|
|
-0.85%
|
|
1.40%
|
|
<
1
|
|
-1.00%
|
|
1.25%
|
There is
an unused commitment fee of 0.25% per annum. Beginning
December 31, 2007, and on the last day of each fiscal quarter thereafter,
the ratio of EBITDA to fixed charges may not be less than
1.5:1. Beginning June 30, 2007, the ratio of total funded debt
to EBITDA may not exceed 3.50:1, reduced to 3.25:1 at March 31, 2008,
June 30, 2008 and September 30, 2008, and then 3:1
thereafter. FutureFuel has guaranteed FutureFuel Chemical’s
obligations under this credit agreement.
As of
September 30, 2007, no borrowings were outstanding under this credit
facility.
7) Provision
for income taxes
|
|
For
the three months ended September 30,
|
|
|
For
the nine months ended September 30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Provision
for income taxes
|
$ |
2,169 |
|
|
$ |
697 |
|
|
$ |
2,886 |
|
|
$ |
584 |
|
Effective
tax rate
|
|
39.4% |
|
|
|
37.7% |
|
|
|
40.7% |
|
|
|
37.7% |
The
effective tax rates for the three and nine months ended September 30, 2007
and 2006 reflect FutureFuel’s expected tax rate on reported operating earnings
before income tax.
FutureFuel
adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretations No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”) on January 1, 2007. FutureFuel does not
and has not possessed a significant liability for unrecognized tax benefits and,
as a result, did not recognize any significant change in this liability as a
result of the implementation of FIN 48.
Notes
to Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
(Unaudited)
FutureFuel
records interest and penalties net as a component of income tax
expense. As of September 30, 2007, FutureFuel had no accrual for
interest or tax penalties.
FutureFuel
and its subsidiary, FutureFuel Chemical, file tax returns in the U.S. federal
jurisdiction and with various state jurisdictions. FutureFuel was
incorporated in 2005 and is subject to U.S., state and local examinations by tax
authorities from 2005 forward. FutureFuel Chemical is subject to the
effects of tax examinations that impact the carry-over basis of its assets and
liabilities. FutureFuel Chemical’s carry-over basis of its assets and
liabilities are no longer subject to U.S. federal, state and local income tax
examinations by tax authorities for years before 2004.
8) Earnings
per share
The
computation of basic and diluted earnings per common share was as
follows:
|
|
|
For
the three months ended September 30,
|
|
|
For
the nine months ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net
income available to common stockholders
|
|
$ |
3,343 |
|
|
$ |
1,151 |
|
|
$ |
4,210 |
|
|
$ |
964 |
|
|
Weighted
average number of common shares outstanding
|
|
|
26,700,000 |
|
|
|
26,700,000 |
|
|
|
26,700,000 |
|
|
|
26,700,000 |
|
|
Effect
of warrants
|
|
|
5,586,294 |
|
|
|
4,379,195 |
|
|
|
5,574,327 |
|
|
|
4,379,195 |
|
|
Weighted
average diluted number of common shares outstanding
|
|
|
32,286,294 |
|
|
|
31,079,195 |
|
|
|
32,274,327 |
|
|
|
31,079,195 |
|
|
Basic
earnings per share
|
|
$ |
0.13 |
|
|
$ |
0.04 |
|
|
$ |
0.16 |
|
|
$ |
0.04 |
|
|
Diluted
earnings per share
|
|
$ |
0.10 |
|
|
$ |
0.04 |
|
|
$ |
0.13 |
|
|
$ |
0.03 |
|
9) Segment
information
FutureFuel
has determined that is 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 and to Eastman Chemical. This
segment comprises two components: “custom manufacturing” (manufacturing
chemicals for specific customers); and “performance chemicals” (multi-customer
specialty chemicals).
Biofuels
FutureFuel’s
biofuels business segment manufactures and markets
biodiesel. Biodiesel revenues are generally derived in one of two
ways. Revenues are generated under tolling agreements whereby
customers supply key biodiesel feed stocks which FutureFuel then converts into
biodiesel at the Batesville Plant in exchange for a fixed price processing
charge per gallon of biodiesel produced. Revenues are also generated
through the production and sale of biodiesel to customers through FutureFuel’s
distribution network at the Batesville Plant and through distribution facilities
available at a leased oil storage facility near Little Rock, Arkansas at
negotiated prices.
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
Notes
to Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
(Unaudited)
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 for the three months ended September 30, 2007 attributable to the
United States and foreign countries (based upon the billing addresses of its
customers) were as follows:
|
Three
Months Ended
|
|
United
States
|
|
|
All
Foreign Countries
|
|
|
Total
|
|
|
September 30,
2007
|
|
$ |
36,884 |
|
|
$ |
9,674 |
|
|
$ |
46,558 |
|
|
September 30,
2006
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
FutureFuel’s
revenues for the nine months ended September 30, 2007 attributable to the
United States and foreign countries (based upon the billing addresses of its
customers) were as follows:
|
Nine
Months Ended
|
|
United
States
|
|
|
All
Foreign Countries
|
|
|
Total
|
|
|
September 30,
2007
|
|
$ |
105,066 |
|
|
$ |
20,619 |
|
|
$ |
125,685 |
|
|
September 30,
2006
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Beginning
in 2005, FutureFuel Chemical Company began invoicing Procter & Gamble
International Operations Mexico, D.F. directly, at which time revenues from
Mexico became a material component of total revenues. Revenues from
Mexico account for 11% of total revenues for both the three and nine months
ended September 30, 2007. Beginning in the third quarter of
2007, FutureFuel Chemical Company began selling significant quantities of
biodiesel to companies in Canada, at which time revenues from Canada became a
material component of total revenues. Revenues from Canada account
for 9% of total revenues for the three months ended September 30, 2007 and
4% of total revenues for the nine months ended September 30,
2007. Other than Mexico and Canada, revenues from a single foreign
country during the three and nine months ended September 30, 2007 did not
exceed 3% of total revenues.
Summary
of business by segment
|
|
|
For
the three months ended September 30,
|
|
|
For
the nine months ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
35,668 |
|
|
$ |
- |
|
|
$ |
105,737 |
|
|
$ |
- |
|
|
Biofuels
|
|
|
10,890 |
|
|
|
- |
|
|
|
19,948 |
|
|
|
- |
|
|
Revenues
|
|
$ |
46,558 |
|
|
$ |
- |
|
|
$ |
125,685 |
|
|
$ |
- |
|
|
Segmented
gross margins
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
8,326 |
|
|
$ |
- |
|
|
$ |
19,047 |
|
|
$ |
- |
|
|
Biofuels
|
|
|
(1,441 |
) |
|
|
- |
|
|
|
(9,028 |
) |
|
|
- |
|
|
Segmented
gross margins
|
|
|
6,885 |
|
|
|
- |
|
|
|
10,019 |
|
|
|
- |
|
|
Corporate
expenses
|
|
|
(2,247 |
) |
|
|
(56 |
) |
|
|
(5,539 |
) |
|
|
(359 |
) |
|
Income
(loss) before interest and taxes
|
|
|
4,638 |
|
|
|
(56 |
) |
|
|
4,480 |
|
|
|
(359 |
) |
|
Interest
income
|
|
|
877 |
|
|
|
1,904 |
|
|
|
2,695 |
|
|
|
1,909 |
|
|
Interest
and other expenses
|
|
|
(3 |
) |
|
|
- |
|
|
|
(79 |
) |
|
|
(2 |
) |
|
Provision
for income taxes
|
|
|
(2,169 |
) |
|
|
(697 |
) |
|
|
(2,886 |
) |
|
|
(584 |
) |
|
Net
income
|
|
$ |
3,343 |
|
|
$ |
1,151 |
|
|
$ |
4,210 |
|
|
$ |
964 |
|
Notes
to Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
(Unaudited)
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) Recently
issued accounting standards
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, Fair Value
Measurements, which addresses the measurement of fair value by companies
when they are required to use a fair value measure for recognition or disclosure
purposes under GAAP. SFAS No. 157 provides a common definition of
fair value to be used throughout GAAP which is intended to make the measurement
of fair value more consistent and comparable and improve disclosures about those
measures. With the exception of other non-financial assets and
liabilities, SFAS No. 157 will be effective for an entity’s financial statements
issued for fiscal years beginning after November 15, 2007. With
respect to other non-financial assets and liabilities, the FASB has provided a
one-year implementation deferral. FutureFuel is currently evaluating
the effect SFAS No. 157 will have on its consolidated financial position,
liquidity, and results of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115. SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value at specified
election dates. Upon adoption, an entity shall report unrealized
gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. Most of the provisions
apply only to entities that elect the fair value option. However, the
amendment to SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with available for
sale and trading securities. SFAS No. 159 will be effective as of the
beginning of an entity's first fiscal year that begins after November 15,
2007. FutureFuel is currently evaluating the effect SFAS No. 159 will
have on its consolidated financial position, liquidity, and results of
operations.
The
following sets forth FutureFuel Chemical Company’s (formerly known as Eastman
SE, Inc.) unaudited statements of operations for the three- and nine-month
periods ended September 30, 2006 and the unaudited statement of cash flows
for the nine-month period ended September 30, 2006.
FutureFuel
Chemical Company, formerly known as Eastman SE, Inc.
Statement
of Operations
For
the Three and Nine Months Ended September 30, 2006
(Dollars
in thousands)
(Unaudited)
|
|
|
Three
Months Ended September 30, 2006
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
Revenues
|
|
$ |
37,677 |
|
|
$ |
97,192 |
|
|
Revenues
– related parties
|
|
|
4,534 |
|
|
|
14,799 |
|
|
Cost
of goods sold
|
|
|
34,780 |
|
|
|
88,322 |
|
|
Cost
of goods sold – related parties
|
|
|
4,534 |
|
|
|
14,799 |
|
|
Distribution
|
|
|
304 |
|
|
|
915 |
|
|
Gross
profit
|
|
|
2,593 |
|
|
|
7,955 |
|
|
Selling,
general and administrative expenses
|
|
|
1,666 |
|
|
|
4,639 |
|
|
Research
and development expenses
|
|
|
1,283 |
|
|
|
3,330 |
|
|
Loss
before income taxes
|
|
|
(356 |
) |
|
|
(14 |
) |
|
Benefit
for income taxes
|
|
|
(86 |
) |
|
|
(4 |
) |
|
Net
loss
|
|
$ |
(270 |
) |
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
FutureFuel
Chemical Company, formerly known as Eastman SE, Inc.
Statement
of Cash Flows
For
the Nine Months Ended September 30, 2006
(Dollars
in thousands)
(Unaudited)
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
Cash
flows used in operating activities
|
|
|
|
|
Net loss
|
|
$ |
(10 |
) |
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
Depreciation
|
|
|
6,760 |
|
|
Provision
for deferred income taxes
|
|
|
414 |
|
|
Losses
on disposals of fixed assets
|
|
|
205 |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
|
(800 |
) |
|
Inventory
|
|
|
(5,731 |
) |
|
Prepaid expenses
|
|
|
(13 |
) |
|
Other assets
|
|
|
(118 |
) |
|
Accounts payable
|
|
|
(1,217 |
) |
|
Accrued
expenses and other current liabilities
|
|
|
(364 |
) |
|
Other
noncurrent liabilities
|
|
|
(61 |
) |
|
Net
cash used in operating activities
|
|
|
(935 |
) |
|
Cash
flows used in investing activities
|
|
|
|
|
|
Capital
expenditures
|
|
|
(7,887 |
) |
|
Net
cash used in investing activities
|
|
|
(7,887 |
) |
|
Cash
flows provided by financing activities
|
|
|
|
|
|
Transfer to parent,
net
|
|
|
8,822 |
|
|
Net
cash provided by financing activities
|
|
|
8,822 |
|
|
Net
change in cash and cash equivalents
|
|
|
- |
|
|
Cash
and cash equivalents at beginning of period
|
|
|
- |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
- |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
Notes
to Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
(Unaudited)
1) Nature
of operations and basis of presentation
Viceroy
Acquisition Corporation
Viceroy
Acquisition Corporation (“Viceroy”) was incorporated under the laws of the state
of Delaware on August 12, 2005 to serve as a vehicle for the acquisition by
way of asset acquisition, merger, capital stock exchange, share purchase or
similar transaction (“Business Combination”) of one or more operating businesses
in the oil and gas industry. On July 12, 2006 Viceroy completed
an equity offering.
On
July 21, 2006, Viceroy entered into an acquisition agreement with Eastman
Chemical Company (“Eastman Chemical”) to purchase all of the issued and
outstanding stock of Eastman SE, Inc. (“Eastman SE”). On
October 27, 2006, a special meeting of the shareholders of Viceroy was held
and the acquisition of Eastman SE was approved by the
shareholders. On October 31, 2006, Viceroy acquired all of the
issued and outstanding shares of Eastman SE from Eastman
Chemical. Immediately subsequent to the acquisition, Viceroy changed
its name to FutureFuel Corp. (“FutureFuel”) and Eastman SE changed its name to
FutureFuel Chemical Company (“FutureFuel Chemical”).
Eastman
SE, Inc.
Eastman
SE was incorporated under the laws of the state of Delaware on September 1,
2005 and subsequent thereto operated as a wholly-owned subsidiary of Eastman
Chemical through October 31, 2006. Eastman SE was incorporated
for purposes of effecting a sale of Eastman Chemical’s manufacturing facility in
Batesville, Arkansas (the “Batesville Plant”). Commencing
January 1, 2006, Eastman Chemical began transferring the assets associated
with the business of the Batesville Plant to Eastman SE.
The
Batesville Plant was constructed to produce proprietary photographic chemicals
for Eastman Kodak Company (“Eastman Kodak”). Over the years, Eastman
Kodak shifted the plant’s focus away from the photographic imaging business to
the custom synthesis of fine chemicals and organic chemical intermediates used
in a variety of end markets, including paints and coatings, plastics and
polymers, pharmaceuticals, food supplements, household detergents and
agricultural products.
In 2005,
the Batesville Plant began the implementation of a biobased products
platform. This includes the production of biofuels (biodiesel,
bioethanol and lignin/biomass solid fuels) and biobased specialty chemical
products (biobased solvents, chemicals and intermediates). In
addition to biobased products, the Batesville Plant continues to manufacture
fine chemicals and other organic chemicals.
The
accompanying financial statements have been prepared by Eastman SE in accordance
and consistent with the accounting policies stated in Eastman SE’s 2006 audited
financial statements and should be read in conjunction with the audited
financial statements of Eastman SE.
In the
opinion of Eastman SE, all normal recurring adjustments necessary for a fair
presentation have been included in the unaudited financial
statements. The unaudited financial statements are presented in
conformity with generally accepted accounting principles (“GAAP”) in the United
States and, of necessity, include some amounts that are based upon management
estimates and judgments. Future actual results could differ from such
current estimates.
Corporate
Allocations
The
financial statements prior to October 31, 2006 include allocations of
certain corporate services provided by Eastman Chemical’s management, including
finance, legal, information systems, human resources and
distribution. Eastman Chemical has utilized its experience with the
business of the Batesville Plant and its judgment in allocating such corporate
services and other support to the periods prior to October 31,
2006. Costs allocated for such services were:
Notes
to Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
(Unaudited)
|
|
|
Three
Months Ended September 30, 2006
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
Distribution
|
|
$ |
117 |
|
|
$ |
377 |
|
|
Selling,
general and administrative
|
|
|
1,416 |
|
|
|
3,892 |
|
|
Research
and development
|
|
|
326 |
|
|
|
587 |
|
|
Total
cost and expenses allocated
|
|
$ |
1,859 |
|
|
$ |
4,856 |
|
Allocations
were made to distribution and selling, general and administrative expenses
primarily based on a percentage of revenues and allocations to research and
development were made primarily on actual time and effort incurred, which
management believes represent reasonable allocation
methodologies. These allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if Eastman SE had
been operating as a separate entity.
2) Benefit
for income taxes
|
|
|
Three
Months Ended September 30, 2006
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
Benefit
for income taxes
|
|
$ |
(86 |
) |
|
$ |
(4 |
) |
|
Effective
tax rate
|
|
|
24.2% |
|
|
|
28.6% |
|
The
effective tax rate for the three- and nine-month periods ended
September 30, 2006 reflect Eastman SE’s expected tax rate on reported
operating earnings before income tax.
3) Segment
information
Eastman
SE has determined that is has two reportable segments organized along product
lines – chemicals and biofuels.
Chemicals
Eastman
SE’s chemicals segment manufactures diversified chemical products that are sold
externally to third party customers and to Eastman Chemical. This
segment comprises two components: “custom manufacturing” (manufacturing
chemicals for specific customers); and “performance chemicals” (multi-customer
specialty chemicals).
Biofuels
Eastman
SE’s biofuels business segment manufactures and markets
biodiesel. Biodiesel revenues are generally derived in one of two
ways. Revenues are generated under tolling agreements whereby
customers supply key biodiesel feed stocks which Eastman SE then converts into
biodiesel at the Batesville Plant in exchange for a fixed price processing
charge per gallon of biodiesel produced. Revenues are also generated
through the sale of biodiesel to customers through Eastman SE’s distribution
network at the Batesville Plant and through distribution facilities available at
a leased oil storage facility near Little Rock, Arkansas at negotiated
prices.
Summary
of revenues by geographic area
Most of
Eastman SE’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 Eastman SE’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
Eastman SE to the customer. Rarely is Eastman SE the
Notes
to Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
(Unaudited)
exporter
of record, never is Eastman SE the importer of record into foreign countries and
Eastman SE is not always aware of the exact quantities of its products that are
moved into foreign markets by its customers. Eastman SE 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. Eastman SE’s revenues for the three and nine months ended
September 30, 2006 attributable to the United States and foreign countries
(based upon the billing addresses of its customers) were as
follows:
|
Periods
ended September 30, 2006
|
|
United
States
|
|
|
All
Foreign Countries
|
|
|
Total
|
|
|
Three
months
|
|
$ |
36,909 |
|
|
$ |
5,302 |
|
|
$ |
42,211 |
|
|
Nine
months
|
|
$ |
96,581 |
|
|
$ |
15,410 |
|
|
$ |
111,991 |
|
Beginning
in 2005, Eastman SE Company began invoicing Procter & Gamble International
Operations Mexico, D.F. directly, at which time revenues from Mexico became a
material component of total revenues. Revenues from Mexico account
for 11% of total revenues for the three months ended September 30, 2006 and
13% of total revenues for the nine months ended September 30,
2006. Other than Mexico, revenues from a single foreign country
during the three and nine months ended September 30, 2006 did not exceed 3%
of total revenues.
Summary
of business by segment
|
|
|
Three
Months Ended September 30, 2006
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
35,842 |
|
|
$ |
102,882 |
|
|
Biofuels
|
|
|
6,369 |
|
|
|
9,109 |
|
|
Revenues
|
|
$ |
42,211 |
|
|
$ |
111,991 |
|
|
Segmented
gross margins
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
6,082 |
|
|
$ |
14,574 |
|
|
Biofuels
|
|
|
(3,489 |
) |
|
|
(6,619 |
) |
|
Segmented gross
margins
|
|
|
2,593 |
|
|
|
7,955 |
|
|
Corporate
expenses
|
|
|
(2,949 |
) |
|
|
(7,969 |
) |
|
Loss
before taxes
|
|
|
(356 |
) |
|
|
(14 |
) |
|
Benefit
for income taxes
|
|
|
86 |
|
|
|
4 |
|
|
Net loss
|
|
$ |
(270 |
) |
|
$ |
(10 |
) |
Depreciation
is allocated to segment costs of goods sold based on plant usage. The
total assets and capital expenditures of Eastman SE 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.
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 ours and FutureFuel Chemical
Company’s financial statements, including the notes thereto. For the
three- and nine-month periods ended September 30, 2006, the financial
information presented combines our consolidated and FutureFuel Chemical
Company’s financial statements. This information is for illustrative
purposes only. The consolidated company would likely have performed
differently had the Company and FutureFuel Chemical Company always been
combined. The information should not be relied on as an indication of
future results that the combined company will experience after the acquisition
of FutureFuel Chemical Company because of a variety of factors, including access
to additional information and changes in value. 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
In General
We were
not incorporated until August 12, 2005, we did not complete our offering
until July 12, 2006 and we did not complete the acquisition of FutureFuel
Chemical Company until October 31, 2006. Other than the offering
and the acquisition, we did not carry on any material business activities prior
to November 1, 2006.
FutureFuel
Chemical Company’s historical revenues have been generated primarily through the
sale of specialty chemicals. FutureFuel Chemical Company breaks its
chemicals business into two main product groups: custom manufacturing and
performance chemicals. Major products in the custom manufacturing
group include: (i) NOBS, a chemical additive manufactured exclusively for
The Procter & Gamble Company for use in a household detergent; (ii) a
proprietary herbicide (and intermediates) manufactured exclusively for Arysta
LifeScience North America Corporation; and (iii) two other product lines
(CPOs and DIPBs) produced under conversion contracts for Eastman Chemical
Company. The major product line in the performance chemicals group is
SSIPA/LiSIPA, polymer modifiers that aid the properties of nylon manufactured
for a broad customer base. There are a number of additional small
volume custom and performance chemical products that FutureFuel Chemical Company
groups into “other products”. In late 2005, FutureFuel Chemical
Company began producing biodiesel as a product. Beginning in 2006,
revenues and cost of goods sold for biofuels were treated as a separate business
segment.
Revenues
generated from NOBS are based on a supply agreement with the
customer. The supply agreement stipulates selling price per kilogram
based on volume produced, with price moving up as volumes move down, and
vice-versa. The current contract expires in June 2008, and no
assurances can be given that the contract will be extended past that date or, if
extended, under what terms. FutureFuel Chemical Company pays for raw
materials required to produce NOBS. The contract with the customer
provides that the price to be received by FutureFuel Chemical Company for NOBS
is indexed to changes in labor, energy, inflation and the key external raw
materials, enabling FutureFuel Chemical Company to pass along most inflationary
increases in production costs to the customer.
FutureFuel
Chemical Company has been the exclusive manufacturer for Arysta LifeScience
North America Corporation of a proprietary herbicide and certain
intermediates. These products are beginning to face some generic
competition, and no assurances can be given that FutureFuel Chemical Company
will remain the exclusive manufacturer for this product line. The
contracts automatically renew for successive one-year periods, subject to the
right of either party to terminate the contract not later than 270 days prior to
the end of the then current term for the herbicide and not later than 18 months
prior to the current term for the intermediates. No assurances can be
given that these contracts will not be terminated. Arysta LifeScience
North America Corporation supplies most of the key raw materials for production
of the proprietary herbicide. There is no pricing mechanism or
specific protection against cost changes for raw materials that FutureFuel
Chemical Company is responsible for purchasing, and we do not anticipate this to
change going forward.
FutureFuel
Chemical Company has historically manufactured CPOs and DIPBs at cost for
Eastman Chemical Company. CPOs are chemical intermediates that
promote adhesion for plastic coatings and DIPBs are intermediates for production
of Eastman Chemical Company products used as general purpose inhibitors,
intermediates or
antioxidants. Historically,
revenues related to CPOs and DIPBs were exactly offset by cost of goods sold;
hence there was no effect on gross profits historically. As part of
our acquisition of FutureFuel Chemical Company, FutureFuel Chemical Company
entered into conversion agreements with Eastman Chemical Company that
effectively provide a conversion fee to FutureFuel Chemical Company for DIPB
based on volume manufactured, with a minimum annual fee for both
products. In addition, the conversion agreements provide for revenue
adjustments for actual price of raw materials purchased by FutureFuel Chemical
Company at standard usages. Eastman Chemical Company provides key raw
materials at no cost. For the key raw materials, usage over standard
is owed Eastman Chemical Company; likewise, any improvement over standard is
owed to FutureFuel Chemical Company at the actual price Eastman Chemical Company
incurred for the key raw material.
SSIPA/LiSIPA
revenues are generated from a diverse customer base of nylon fiber
manufacturers. Contract sales with two customers are indexed to key
raw materials for inflation; otherwise, there is no pricing mechanism or
specific protection against raw material cost changes, and we do not anticipate
this to change going forward.
Other
products include agricultural intermediates and additives, imaging chemicals,
fiber additives and various specialty pharmaceutical intermediates that
FutureFuel Chemical Company has in full commercial production or in
development. These products are currently sold in small quantities to
a large customer base. Pricing for these products is negotiated
directly with the customer (in the case of custom manufacturing) or is
established based upon competitive market conditions (in the case of performance
chemicals). In general, for these products, there is no pricing
mechanism or specific protection against raw material cost changes, and we do
not anticipate this to change going forward.
The year
ended December 31, 2006 was the first full year that FutureFuel Chemical
Company sold biodiesel. In addition to selling for its own account,
FutureFuel Chemical Company produced, for a fee, biodiesel for a third party
under a tolling agreement. Under that tolling agreement, for every
gallon of feedstock provided by that party to FutureFuel Chemical Company,
FutureFuel Chemical Company was obligated to deliver one gallon of biodiesel, up
to a maximum amount of 6 million gallons annually. The tolling
agreement terminated on September 30, 2007 and was not
renewed. FutureFuel Chemical Company delivered approximately
2.1 million gallons pursuant to that tolling agreement.
The
majority of our and FutureFuel Chemical Company’s expenses are cost of goods
sold. Cost of goods sold reflect 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 FutureFuel Chemical
Company’s plant. Significant conversion costs include labor,
benefits, energy, supplies and maintenance and repair. In addition to
raw material and conversion costs, cost of goods sold includes environmental and
inventory reserves and costs related to idle capacity. Finally, cost
of goods sold includes hedging gains and losses recognized by
us. Cost of goods sold are allocated to the chemical and biofuels
business segments based on equipment usage and reactor time for most conversion
costs and based on revenues for most other costs.
Operating
costs include selling, general and administrative and research and development
expenses. These expense categories include expenses that were
directly incurred by us and FutureFuel Chemical Company and, for the three- and
nine-month periods ended September 30, 2006, corporate expense allocations
from Eastman Chemical Company. Allocations from Eastman Chemical
Company of costs of goods sold, distribution and selling and general
administrative expenses were made primarily based on a percentage of revenues
and allocations of research and development expenses were made based upon actual
time incurred; we believe both represent reasonable allocation
methodologies. These allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if FutureFuel
Chemical Company had been operating as a separate entity. Beginning
November 1, 2006, all operating expenses were directly incurred by us and
FutureFuel Chemical Company. Please see footnote 1 of FutureFuel
Chemical Company’s financial statements for a more detailed discussion of
corporate expense allocations from Eastman Chemical Company.
The
financial statements provided herein disclose related party transactions and the
impact of those transactions on historical revenues and expenses. The
discussions of results of operations that follow are based on revenues and
expenses in total and for individual product lines and do not differentiate
related party transactions.
Quarter Ended September 30, 2007
Compared to Quarter Ended September 30, 2006
Revenues: Revenues for the
quarter ended September 30, 2007 were $46,558,000 as compared to revenues
for the quarter ended September 30, 2006 of $42,211,000, an increase of
10%. The increase was primarily attributable to CPOs, other products
and biodiesel. Revenues from SSIPA/LiSIPA contributed modestly to the
increase. Revenues from NOBS, the proprietary herbicide and
intermediates and DIPBs each decreased approximately 10%. Revenues
from biodiesel increased 70% and accounted for 23% of total revenues in 2007 as
compared to 15% in 2006. Revenues from NOBS decreased 10% and
accounted for 43% of total revenues in 2007 as compared to 53% in
2006. Revenues from the proprietary herbicide and intermediates
decreased 8% and accounted for 13% of total revenues in 2007 as compared to 15%
in 2006. Revenues from CPOs increased 62% in 2007 and accounted for
4% of total revenues in 2007 as compared to 3% in 2006. Revenues from
DIPBs decreased 13% and accounted for 4% of total revenues in 2007 as compared
to 5% in 2006. Revenues from SSIPA/LiSIPA increased 9% and accounted
for 4% of total revenues in both 2007 and 2006. Revenues from other
products increased 110% and accounted for 9% of total revenues in 2007 as
compared to 5% in 2006.
Revenues
from NOBS declined moderately for the second consecutive
quarter. However, on a year-to-date basis, as detailed below,
revenues are down only 4%, which is roughly in line with our expectations of
stable demand from this customer. Revenues from the proprietary
herbicide and intermediates decreased 8% during the third quarter of 2007 due
primarily to a drop in demand following a very strong second
quarter. Demand from this customer typically fluctuates during the
year as the customer manages inventory levels and responds to changing market
conditions. The decrease in demand was offset to a small degree by a
price increase passed along to the customer in the second quarter of 2007 to
recoup increased raw material costs. Demand from this customer for
the proprietary herbicide and intermediates remained strong through the
remainder of the year. At present, revenues from NOBS and the
proprietary herbicide and intermediates are together the most significant
components of FutureFuel Chemical Company’s revenue base, together accounting
for 56% of revenues in the quarter ended September 30, 2007 as compared to
68% in the quarter ended September 30, 2006. The future volume
of and revenues from NOBS depends on both consumer demand for the product
containing NOBS and the manufacturing, sales and marketing priorities of our
NOBS customer. We are unable to predict with certainty the revenues
we will receive from NOBS in the future. The prices for the
proprietary herbicide and intermediates were reduced by 10% early in 2007 due to
continued competitive pressures from generic product
competition. This price decrease was partially offset by a
June 1, 2007 price increase of approximately 4% to cover certain raw
material cost increases that we had incurred beginning in the first quarter of
2007. We believe our customer has been able to maintain its volume in
light of generic competition by being more price competitive, changing its North
American distribution system and developing new applications.
Revenues
from CPOs and DIPBs together increased 14% during the third quarter of
2007. This increase is largely the result of new supply agreements
and pricing mechanisms in place following the acquisition of FutureFuel Chemical
Company.
Revenue
from biodiesel increased in 2007 due to an increase in production capacity from
750,000 gallons per quarter at September 30, 2006 to 6 million gallons
per quarter at September 30, 2007.
Cost of Goods Sold and
Distribution: Total cost of goods sold and distribution for
the quarter ended September 30, 2007 were $39,673,000 as compared to total
cost of goods sold and distribution for the quarter ended September 30,
2006 of $39,618,000, an increase of less than 1%.
Cost of
goods sold and distribution for the quarter ended September 30, 2007 for
FutureFuel Chemical Company’s chemicals segment were $27,342,000 as compared to
cost of goods sold and distribution for the quarter ended September 30,
2006 of $29,760,000. Gross margins improved for all chemical products
during the third quarter of 2007 as compared to 2006, with the exception of
NOBS, where gross margins decreased from 27% of total chemical revenues to
25%. This decrease was largely the result of increased raw material
prices resulting from new supply agreements and contractual pricing mechanisms
in place following the acquisition of FutureFuel Chemical Company. As
a whole, gross margin for the chemicals segment increased from 17% of total
chemical revenues in the third quarter of 2006 to 23% in
2007. Increased margins for the chemical segment are primarily
attributable to cost reduction efforts implemented during the first half of 2007
as well as higher revenues from biofuels, which pulled fixed cost away from the
chemicals segment.
Cost of
goods sold and distribution for the quarter ended September 30, 2007 for
FutureFuel Chemical Company’s biofuels segment were $12,301,000 as compared to
cost of goods sold and distribution for the quarter ended September 30,
2006 of $9,858,000. This 25% increase in cost of goods sold and
distribution was far less than the 70% increase in biofuels
revenue. Reduced per gallon costs were attributable to a focus on
continuous production, as more fully described below.
The
biofuels segment began production in the batch plant and has continued to
utilize the batch process to test new processing techniques, experiment with
various alternative feedstocks and meet peak demand. The biodiesel
segment also utilizes a continuous processing line that is more efficient and
produces higher volumes per reactor than the batch process, and hence absorbs
fewer overhead costs per gallon of biodiesel produced. FutureFuel
Chemical Company is transitioning from primarily batch processing to primarily
continuous processing, a strategy which is expected to significantly reduce
fixed cost allocation and as a result reduce total cost of goods sold and
distribution per gallon of biodiesel product.
Operating
Expenses: Operating expenses decreased from $3,005,000 for the
quarter ended September 30, 2006 to $2,247,000 for the quarter ended
September 30, 2007, or approximately 25%. This decrease was
primarily the result of lower overall operating expenses incurred by FutureFuel
Chemical Company on a standalone basis.
Provision for Income
Taxes: The effective tax rates for the three months ended
September 30, 2007 and 2006 reflect our expected tax rate on reported
operating earnings before income taxes. We have determined that we do
not believe that we have a more likely than not probability of realizing a
portion of our deferred tax assets. As such, we have recorded a
valuation allowance of $528,000 at September 30, 2007.
Nine Months Ended September 30, 2007
Compared to Nine Months Ended September 30, 2006
Revenues: Revenues for the
nine months ended September 30, 2007 were $125,685,000 as compared to
revenues for the nine months ended September 30, 2006 of $111,991,000, an
increase of 12%. Revenues from all product lines excluding NOBS and
the proprietary herbicide and intermediates increased greater than
15%. Revenues from biodiesel increased more than 100% and accounted
for 16% of total revenues in 2007 as compared to 8% in 2006. Revenues
from NOBS decreased 4% and accounted for 47% of total revenues in 2007 as
compared to 55% in 2006. Revenues from the proprietary herbicide and
intermediates decreased 9% and accounted for 14% of total revenues in 2007 as
compared to 17% in 2006. Revenues from CPOs increased 42% in 2007 and
accounted for 4% of total revenues in 2007 as compared to 3% in
2006. Revenues from DIPBs increased 16% and accounted for 5% of total
revenues in both 2007 and 2006. Revenues from SSIPA/LiSIPA increased
33% and accounted for 5% of total revenues in 2007 as compared to 4% in
2006. Revenues from other products increased 43% and accounted for 9%
of total revenues in 2007 as compared to 8% in 2006.
Revenues
from NOBS and the proprietary herbicide and intermediates are the most
significant components of FutureFuel Chemical Company’s revenue base, together
accounting for 61% of revenues in the nine months ended September 30, 2007
as compared to 72% in the nine months ended September 30,
2006. See above for a discussion of pricing and demand for these
products.
Revenues
from CPOs and DIPBs together increased 26% during the first nine months of
2007. This increase is largely the result of new supply agreements
and contractual pricing mechanisms in place following the acquisition of
FutureFuel Chemical Company.
Revenue
from biodiesel increased in 2007 due to an increase in production capacity from
750,000 gallons per quarter at September 30, 2006 to 6 million gallons
per quarter at September 30, 2007.
Cost of Goods Sold and
Distribution: Total cost of goods sold and distribution for
the nine months ended September 30, 2007 were $115,666,000 as compared to
total cost of goods sold and distribution for the nine months ended
September 30, 2006 of $104,036,000, an increase of 11%.
Cost of
goods sold and distribution for the nine months ended September 30, 2007
for FutureFuel Chemical Company’s chemicals segment were $86,690,000 as compared
to cost of goods sold and distribution for the nine months ended
September 30, 2006 of $88,307,000, a decrease of 2%. Gross
margins improved for all chemical products during the first nine months of 2007
as compared to 2006, with the exception of NOBS, where gross
margin
decreased from 31% of total chemical revenues to 19%. This decrease
was largely the result of increased raw material prices resulting from new
supply agreements and contractual pricing mechanisms in place following the
acquisition of FutureFuel Chemical Company. As a whole, gross margin
for the chemicals segment increased from 14% of total chemical revenues in the
first nine months of 2006 to 18% in 2007. Increased margins for the
chemical segment are primarily attributable to cost reduction efforts
implemented during the first half of 2007 as well as higher revenues from
biofuels, which pulled fixed cost away from the chemicals segment.
Cost of
goods sold and distribution for nine months ended September 30, 2007 for
FutureFuel Chemical Company’s biofuels segment were $28,949,000 as compared to
cost of goods sold and distribution for the nine months ended September 30,
2006 of $15,729,000. This 84% increase in cost of goods sold and
distribution was less than the 118% increase in biofuels
revenue. Reduced per gallon costs were more pronounced during the
second and third quarter of 2007 than the first quarter and were attributable to
a focus on continuous production, as more fully described above.
Operating
Expenses: Operating expenses decreased from $8,328,000 for the
nine months ended September 30, 2006 to $5,539,000 for the nine months
ended September 30, 2007, or approximately 33%. This decrease
was primarily the result of lower overall operating expenses incurred by
FutureFuel Chemical Company on a standalone basis.
Provision for Income
Taxes: The effective tax rates for the nine months ended
September 30, 2007 and 2006 reflect our expected tax rate on reported
operating earnings before income taxes. We have determined that we do
not believe that we have a more likely than not probability of realizing a
portion of our deferred tax assets. As such, we have recorded a
valuation allowance of $528,000 at September 30, 2007.
Critical
Accounting Estimates
Purchase price allocation:
Following our acquisition of Eastman SE, Inc., we allocated the cost of the
acquired entity to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. We do not
anticipate these estimates changing in the future.
Allowance for doubtful
accounts: We reduce our accounts receivable by amounts that may be
uncollectible in the future. This estimated allowance is based upon
management’s evaluation of the collectibility of individual invoices and is
based upon management’s evaluation of the financial condition of our customers
and historical bad debt experience. This estimate is subject to
change based upon the changing financial condition of our
customers. At September 30, 2007 and December 31, 2006, we
recorded an allowance for doubtful accounts of $42,000 and $42,000,
respectively, the majority of which pertained to one
customer. FutureFuel Chemical Company historically has not
experienced significant problems in collecting its receivables and we do not
expect this to change going forward.
Depreciation: Depreciation
is provided for using the straight-line method over the associated assets’
estimated useful lives. We primarily base our estimate of an asset’s
useful life on our experience with other similar assets. The actual
useful life of an asset may differ significantly from our estimate for such
reasons as the asset’s build quality, the manner in which the asset is used or
changes in the business climate. When the actual useful life differs
from the estimated useful life, impairment charges may result. We
monitor the estimate useful lives of our assets and do not currently anticipate
any impairment charges.
Asset retirement
obligations: We establish reserves for closure/post-closure
costs associated with the environmental and other assets we
maintain. Environmental assets include waste management units such as
incinerators, landfills, storage tanks and boilers. When these types
of assets are constructed or installed, a reserve is established for the future
costs anticipated to be associated with the closure of the site based on an
expected life of the environmental assets, the applicable regulatory closure
requirements and our environmental policies and practices. These
expenses are charged into earnings over the estimated useful life of the
assets. The future costs anticipated to be associated with the
closure of the site are based upon estimated current costs for such activities
adjusted for anticipated future inflation rates. Unanticipated
changes in either of these two variables or changes in the anticipated timing of
closure/post-closure activities may significantly affect the established
reserves. At September 30, 2007 and December 31, 2006, we
recorded reserves for closure/post-closure liabilities of $561,000 and
$545,000,
respectively. We
monitor this reserve and the assumptions used in its calculation. As
deemed necessary, we have made changes to this reserve balance and anticipate
that future changes will occur.
Income taxes: We
account for income taxes using the asset and liability method. Under
this method, income tax assets and liabilities are recognized for temporary
differences between financial statement carrying amounts of assets and
liabilities and their respective income tax basis. A future income
tax asset or liability is estimated for each temporary difference using enacted
and substantively enacted income tax rates and laws expected to be in effect
when the asset is realized or the liability settled. Changes in the
expected tax rates and laws to be in effect when the asset is realized or the
liability settled could significantly affect the income tax assets and
liabilities booked by us. We monitor changes in applicable tax laws
and adjust our income tax assets and liabilities as necessary.
Liquidity
and Capital Resources
Our and
FutureFuel Chemical Company’s net cash provided by (used in) operating
activities, investing activities and financing activities for the nine months
ended September 30, 2007 and 2006 was:
(Dollars
in thousands)
|
|
|
2007
|
|
|
2006
|
|
|
Net
cash provided by (used in) operating activities
|
|
$ |
19,103 |
|
|
$ |
72 |
|
|
Net
cash provided by (used in) investing activities
|
|
$ |
(28,119 |
) |
|
$ |
(7,887 |
) |
|
Net
cash provided by (used in) financing activities
|
|
$ |
(50 |
) |
|
$ |
7,930 |
|
Operating
Activities: Cash provided by operating activities increased
from $72,000 during the nine months ended September 30, 2006 to $19,103,000
during the nine months ended September 30, 2007. This increase
primarily resulted from changes in accounts receivable, inventory and accounts
payable. Cash generated from (used in) changes in accounts receivable
was $6,554,000 during the first three quarters of 2007 as compared to $(800,000)
during the first three quarters of 2006. At the end of 2006,
FutureFuel Chemical Company’s accounts receivable were abnormally high as
Eastman Chemical Company had collected a significant amount of payments on
behalf of FutureFuel Chemical Company but had not yet transferred funds to
FutureFuel Chemical Company. These funds were collected during the
six months ended June 30, 2007 and there was no balance owed FutureFuel
Chemical Company at September 30, 2007. Cash generated from
(used in) changes in inventory was $(2,351,000) during the first nine months of
2007 as compared to $(5,731,000) during the first nine months of
2006. Inventory at December 31, 2006 was higher than historical
norms and FutureFuel Chemical Company was successful during the first quarter of
2007 in reducing inventory days outstanding. The decrease in
inventory from December 31, 2006 to September 30, 2007 was partially
offset by accumulation of biodiesel feedstocks and finished product inventories
during the second and third quarters of 2007. Cash generated from
(used in) changes in accounts payable was $5,909,000 during the first nine
months of 2007 as compared to $(373,000) during the first nine months of
2006. The increase in accounts payable is primarily attributable to
increased demand, and hence increased production, across several major product
lines. Other significant changes in cash included a decrease in
income taxes payable during the first nine months of 2007 of $(1,490,000); there
was no cash generated from (used in) income taxes payable during the first nine
months of 2006 as Eastman Chemical Company handled all tax obligations for
FutureFuel Chemical Company. The change in income taxes payable was
mostly offset by cash generated from the change in the fair value of derivative
instruments of $1,095,000 during the first nine months of 2007. There
was no cash generated from (used in) the change in the fair value of derivative
instruments during the first nine months of 2006 as FutureFuel Chemical Company
did not employ hedging strategies for feedstock procurement or finished product
sales in its biodiesel business.
Investing
Activities: Cash provided by (used in) investing activities
during the first nine months of 2007 was $(28,119,000) as compared to
$(7,887,000) during the first nine months of 2006. This decrease was
primarily attributable to an $14,803,000 purchase of marketable securities
during the third quarter of 2007, as well as increased capital expenditures
driven by FutureFuel Chemical Company’s expansion of its biodiesel related
infrastructure and spending on implementation of a new ERP system.
Financing
Activities: Cash provided by (used in) financing activities
during the first nine months of 2007 was $(50,000) as compared to $7,930,000
during the first nine months of 2006. Financing activities during
2007
consisted
solely of the payment of a bank financing fee. Financing activities
during 2006 consisted of transfers of cash to Eastman Chemical Company and
proceeds from long-term debt from related parties.
Off-Balance
Sheet Arrangements
Our only
off-balance sheet arrangements are: (i) the financial assurance trusts
established for the benefit of the Arkansas Department of Environmental Quality;
and (ii) hedging transactions. The financial assurance trusts
aggregate $3,236,000 at September 30, 2007 and were established to provide
assurances to the Arkansas Department of Environmental Quality that, in the
event the Batesville facility is closed permanently, any reclamation activities
necessitated under applicable environmental laws will be
completed. Such financial assurance trusts are not reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
investors. The amounts held in trust are included in restricted cash
and cash equivalents on our balance sheet. The closure liabilities
are included in other noncurrent liabilities, but only on a present value
basis.
We engage
in two types of hedging transactions. First, we hedge our biodiesel
sales through the purchase and sale of futures contracts and options on futures
contracts of energy commodities. Such futures contracts and options
on contracts of energy commodities are detailed in note 6 to our annual
consolidated financial statements. This activity was captured on our
balance sheet at September 30, 2007 and at December 31,
2006. Second, we hedge our biodiesel feedstocks through the execution
of purchase contracts and supply agreements with certain
vendors. These hedging transactions are recognized in earnings and
were not recorded on our balance sheet at September 30, 2007 or
December 31, 2006 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 biodiesel feedstocks generally involves two
components: basis and price. Basis covers any refining or processing
required as well as transportation. Price covers the purchases of the
actual agricultural commodity. Both basis and price fluctuate over
time. A supply agreement with a vendor constitutes a hedge when
FutureFuel Chemical Company has committed to a certain volume of feedstock in a
future period and has fixed the basis for that volume.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
In recent
years, general economic inflation has not had a material adverse impact on
FutureFuel Chemical Company’s 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 (acetic anhydride, electricity,
coal, natural gas, biofuel feedstocks, 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, so raw material price risk remains a significant
risk.
In order
to manage price risk caused by market fluctuations in biofuel prices, we may
enter into exchange traded commodity futures and options
contracts. We account for these derivative instruments in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 133 Accounting for Derivative
Instruments and Hedging Activities, as amended. Under these
standards, 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 2007 or in any preceding year. Changes in the fair value of
our derivative instruments are recognized at the end of each accounting period
and recorded in the statement of operations as a component of cost of goods
sold.
Our
immediate recognition of derivative instrument gains and losses can cause net
income to be volatile from quarter to quarter due to the timing of the change in
value of the derivative instruments relative to the sale of biofuel
being
sold. As of December 31, 2006 and September 30, 2007, the
fair values of our derivative instruments were a net liability in the amount of
$447,000 and $1,542,000, 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. For
the year ended December 31, 2006, these items are principally comprised of
acetic anhydride, electricity, coal, natural gas, methanol, soybean oil and
caustic soda. The availability and price of all of these items are
subject to wide fluctuations due to unpredictable factors such as weather
conditions, overall economic conditions, farmers’ planting decisions,
governmental policies 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 in
2006. 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 commodities listed below would result in the
following change in annual gross profit:
(Volumes
and dollars in thousands)
|
Item
|
|
Volume
Requirements
|
|
Units
|
|
Hypothetical
Adverse Change in Price
|
|
Decrease
in
Gross
Profit
|
|
Percentage
Decrease
in
Gross
Profit
|
|
Acetic
anhydride(a)
|
|
7,256
|
|
KG
|
|
10.0%
|
|
$459
|
|
4.1%
|
|
Electricity(a)
|
|
84
|
|
MWH
|
|
10.0%
|
|
$437
|
|
3.8%
|
|
Coal(a)
|
|
40
|
|
MT
|
|
10.0%
|
|
$407
|
|
3.7%
|
|
Natural
gas(a)
|
|
200
|
|
KSCF
|
|
10.0%
|
|
$275
|
|
2.5%
|
|
Methanol(a)
|
|
5,915
|
|
KG
|
|
10.0%
|
|
$205
|
|
1.8%
|
|
Soybean
oil(b)
|
|
20,037
|
|
KG
|
|
10.0%
|
|
$1,207
|
|
10.9%
|
|
Caustic
soda(a)
|
|
10
|
|
MT
|
|
10.0%
|
|
$157
|
|
1.4%
|
__________
|
(a)
|
Volume
requirements, average price information and impact on gross profit are
based upon volumes used, prices obtained and gross profit reported for the
twelve months ended December 31, 2006. Volume requirements
may differ materially from these quantities in future years as the
business of FutureFuel Chemical Company
evolves.
|
|
(b)
|
The
percentage decrease in gross profit of a hypothetical adverse change in
price for this item has changed materially during the first nine months of
2007. Volume requirements, average price information and impact
on gross profit for this item are based upon volumes used, prices obtained
and gross profit reported for the nine months ended September 30,
2007. Volume requirements may differ materially from these
quantities in future years as the business of FutureFuel Chemical Company
evolves.
|
As of
September 30, 2007, we had no borrowings and, as such, were not exposed to
interest rate risk. Due to the relative insignificance of
transactions denominated in a foreign currency, we consider our foreign currency
risk to be immaterial.
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 (“Exchange
Act”)) as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and our
Principal Financial Officer have concluded that these disclosure controls and
procedures as of September 30, 2007 were effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms. Notwithstanding the foregoing, we did not timely file this
report as a result of our having to restate our financial statements to apply
purchase accounting to the acquisition of
Eastman
SE, Inc. The restatement of our financial statements for the year
ended December 31, 2006 and the quarter ended March 31, 2007 is more
fully disclosed in note 2 to our consolidated financial statements included
in our Amendment No. 2 to Form 10, filed February 29, 2008 with
the SEC.
The
disclosure controls and procedures are designed to, among other things, mitigate
the effect of material weaknesses in our internal control over financial
reporting disclosed in our Amendment No. 2 to Form 10, filed
February 29, 2008. We have expended substantial financial
resources, and our senior management and accounting staff have devoted
significant time and attention, in support of these
efforts. Additional information relating to the material weaknesses
and management efforts to mitigate the effect on our disclosure controls is set
forth in the Amendment No. 2 to Form 10 under the captions “Risk
Factors” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” We believe that these processes and
procedures mitigate the potential effect of the identified material weaknesses
in internal control over financial reporting and the disclosure included in our
filings under the Exchange Act. As a result of these disclosure
controls, we believe, and our Chief Executive Officer and Principal Financial
Officer have certified to their knowledge that, this report on Form 10-Q
does not contain any untrue statement of material fact or omit to state any
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered in this report.
Our
management, including our Chief Executive Officer and Principal Financial
Officer, does not expect that our disclosure controls and procedures will
prevent or detect all errors and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be
met. The design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections
of any evaluation of controls effectiveness to future periods are subject to
risks. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with policies or
procedures.
PART
II
OTHER
INFORMATION
Item
1. Legal Proceedings.
Neither
we nor our subsidiary are a party to, nor is any of ours or their property
subject to, any material pending legal proceedings, other than ordinary routine
litigation incidental to their businesses. However, from time to
time, FutureFuel Chemical Company and its operations may be parties to, or
targets 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.
See our
Amendment No. 2 to Form 10 Registration Statement filed with the Securities
and Exchange Commission on February 29, 2007 for a description of “Risk
Factors” relating to an investment in us. There are no material
changes from the risk factors disclosed in such filing.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to Vote of Security Holders.
None.
Item
5. Other Information.
None.
Item
6. Exhibits and Reports on Form 8-K.
|
Exhibit
No.
|
Description
|
|
31(a)
|
Rule
13a-15(e)/15d-15(e) Certification of chief executive
officer
|
|
31(b)
|
Rule
13a-15(e)/15d-15(e) Certification of principal financial
officer
|
|
32
|
Section
1350 Certification of chief executive officer and principal financial
officer
|
Forward
Looking Information
This Form
contains or incorporates by reference “forward-looking
statements”. When used in this document, the words “anticipate,”
“believe,” “estimate,” “expect,” “plan,” and “intend” and similar expressions,
as they relate to us, FutureFuel Chemical Company or our respective management,
are intended to identify forward-looking statements. These
forward-looking statements are based on current management assumptions and are
subject to uncertainties and inherent risks that could cause actual results to
differ materially from those contained in any forward-looking
statement. We caution you therefore that you should not rely on any
of these forward-looking statements as statements of historical fact or as
guarantees or assurances of future performance. Important factors
that could cause actual results to differ materially from those in the
forward-looking statements include regional, national or global political,
economic, business, competitive, market and regulatory conditions as well as,
but not limited to, the following:
|
·
|
our
board’s selection of FutureFuel Chemical Company as a prospective target
business;
|
|
·
|
conflicts
of interest of our officers and
directors;
|
|
·
|
potential
future affiliations of our officers and directors with competing
businesses;
|
|
·
|
the
control by our founding shareholders of a substantial interest in
us;
|
|
·
|
the
highly competitive nature of the chemical and alternative fuel
industries;
|
|
·
|
fluctuations
in energy prices may cause a reduction in the demand or profitability of
the products or services we may ultimately produce or offer or which form
a portion of our business;
|
|
·
|
changes
in technology may render our products or services
obsolete;
|
|
·
|
failure
to comply with governmental regulations could result in the imposition of
penalties, fines or restrictions on operations and remedial
liabilities;
|
|
·
|
the
operations of FutureFuel Chemical Company’s biofuels business may be
harmed if the applicable government were to change current laws and/or
regulations;
|
|
·
|
our
board may have incorrectly evaluated FutureFuel Chemical Company’s
potential liabilities;
|
|
·
|
our
board may have FutureFuel Chemical Company engage in hedging transactions
in an attempt to mitigate exposure to price fluctuations in petroleum
product transactions and other portfolio positions which may not
ultimately be successful; and
|
|
·
|
we
may not continue to have access to capital markets and commercial bank
financing on favorable terms and FutureFuel Chemical Company may lose its
ability to buy on open credit
terms.
|
Although
we believe that the expectations reflected by such forward-looking statements
are reasonable based on information currently available to us, no assurances can
be given that such expectations will prove to have been correct. All
forward-looking statements included in this Form and all subsequent oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary
statements. We undertake no obligation to publicly update or revise
any forward-looking statement, whether as a result of new information, future
events or otherwise. Readers are cautioned not to place undue
reliance on any forward-looking statements, which speak only as to their
particular dates.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
FUTUREFUEL
CORP.
By: /s/ Douglas D.
Hommert
Douglas
D. Hommert, Executive Vice President, Secretary
and
Treasurer
Date: March
11, 2008
28