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FutureFuel Corp. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for FutureFuel Corp. for the period ended September 30, 2009. FutureFuel operates two primary segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production). The company operates a manufacturing facility in Batesville, Arkansas, and recently expanded biodiesel capacity with a new continuous processing line initiated in May 2009.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 14% in Q3 2009 and 13% in the first nine months of 2009 compared to the same periods in 2008.
  • Chemicals: Revenues declined 7% (Q3) and 10% (9mo), driven by a 59% drop in CPO revenues (automotive market impact) and a 16% drop in bleach activator revenues (lower volumes/pricing).
  • Biofuels: Revenues declined 30% (Q3) and 21% (9mo) due to lower market prices for diesel/biodiesel, despite a 22% (Q3) and 52% (9mo) increase in sales volume.
• Profitability: Net income increased 37% in Q3 2009 ($7.4M vs $5.4M) despite lower revenues, primarily due to a 54% reduction in biofuels Cost of Goods Sold (driven by lower feedstock costs and a $2M state grant). For the nine-month period, net income decreased 10% ($13.1M vs $14.5M).
• Liquidity: Cash and cash equivalents increased significantly from $27.5 million at year-end 2008 to $73.1 million at September 30, 2009. This was driven by strong operating cash flow and net proceeds from the sale of marketable securities and auction rate securities.
• Investments: The company reduced its holdings in marketable debt securities and auction rate securities, moving from $46.4 million in such assets at year-end 2008 to $2.8 million at September 30, 2009.

Outlook, Risks, and Management Commentary

• Guidance: Management anticipates moderate revenue increases for CPOs and DIPB in Q4 2009 but notes continued challenges in the automotive and housing markets. No specific financial guidance for the full year was provided.
• Key Risk - Tax Credit Expiration: The federal biodiesel excise tax credit ($1.00/gallon) expires on December 31, 2009. Management warns that if not extended, production costs will rise, potentially resulting in negative margins and a cessation of biodiesel production.
• Legal Contingencies:
  • Contractor Dispute: FutureFuel is suing a general contractor who defaulted on a plant construction project; the contractor has filed a counterclaim.
  • Trade Association Dispute: FutureFuel is in litigation with a biodiesel trade association regarding fees for health effects data required by the EPA.
• Market Risk: The company is exposed to commodity price fluctuations (animal fat, electricity) and uses derivative instruments (futures/options) to hedge, though these are marked-to-market and can cause earnings volatility.

Investor Verification Checklist

• Tax Credit Status: Verify the legislative status of the federal biodiesel tax credit extension beyond December 31, 2009, as this is critical to the biofuels segment's viability.
• Customer Concentration: Confirm the stability of contracts with major customers (e.g., Procter & Gamble for bleach activator, Arysta LifeScience for herbicides), which represent a significant portion of revenue.
• Legal Outcomes: Monitor the resolution of the pending litigation with the general contractor and the biodiesel trade association to assess potential financial impact.
• Feedstock Margins: Track the spread between biodiesel selling prices and feedstock costs (animal fat/vegetable oils) to evaluate gross margin sustainability without the tax credit.
• Derivative Exposure: Review the fair value of outstanding derivative instruments ($1.8M net liability as of Sep 30, 2009) and their impact on future earnings volatility.