FutureFuel Corp. 10-Q Summary: Quarter Ended March 31, 2009
Business Context and Reporting Period
This is a quarterly report (Form 10-Q) for FutureFuel Corp. for the three-month period ended March 31, 2009. The company operates two primary segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production). The company is headquartered in St. Louis, Missouri, with its primary manufacturing facility in Batesville, Arkansas. As of May 11, 2009, there were 28,190,300 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $39.74 million | $43.22 million |
| Gross Profit | $6.36 million | $10.58 million |
| Net Income | $2.82 million | $6.16 million |
| Diluted EPS | $0.10 | $0.23 |
| Operating Cash Flow | $2.65 million | $5.31 million |
| Cash and Equivalents (Ending) | $57.27 million | $34.31 million |
| Total Debt | $0 | $0 |
| Working Capital | $101.81 million | $106.22 million |
Note: All figures in millions unless otherwise noted. Debt refers to borrowings under the $50 million credit facility, which remained unused.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 8% year-over-year. The Chemicals segment revenue dropped 7% (driven by a 25% volume decline in bleach activator sales and zero demand for CPOs due to automotive industry slowdowns). The Biofuels segment revenue dropped 14% due to lower market prices, despite a 95% increase in volume sold.
- Profitability Compression: Net income fell 54% to $2.82 million. Gross margin for the Biofuels segment turned negative (-$1.02 million) compared to a positive $2.14 million in Q1 2008. This was largely due to the absence of a $2.0 million state grant received in the prior year.
- Liquidity Improvement: Cash and cash equivalents increased significantly from $27.5 million to $57.3 million. This was driven by a net positive cash flow from investing activities of $27.2 million, primarily from the sale of marketable securities and commercial paper.
- Investment Portfolio Shift: The company liquidated U.S. Treasury bills and commercial paper held at year-end. Remaining marketable assets consist primarily of auction rate securities valued at $13.2 million.
Guidance, Outlook, and Risks
- Capacity Expansion: Management expects a new 35 million gallon per year biodiesel continuous processing line to be fully operational by the end of Q2 2009. Total capacity is targeted at 59 million gallons annually.
- Grant Uncertainty: The company has applied for the next period of the Arkansas Alternative Fuels Development Program (up to $2.0 million) but has not yet received funding. Income is recognized only upon receipt.
- Legal Contingencies:
- Contractor Dispute: A general contractor defaulted on a fixed-price plant construction project. FutureFuel has filed suit for damages, but the contractor has counterclaimed. The financial impact is currently undeterminable.
- Trade Association Dispute: FutureFuel is in litigation with a biodiesel trade association regarding fees for health effects data required by the EPA. The association has sued for collection of alleged fees.
- Market Risks: The company faces significant exposure to commodity price fluctuations (animal fat, electricity) and biodiesel pricing. A 10% adverse price change in animal fat could reduce annual gross profit by approximately 8%.
- Customer Concentration: Revenues from the bleach activator and proprietary herbicide accounted for 69% of total revenue in Q1 2009. Future volumes depend heavily on these specific customers' demand and contract renewals.
Investor Verification Checklist
- Auction Rate Securities Liquidity: Verify the current market status and liquidity of the $13.2 million in auction rate securities, given historical market freezes in this asset class.
- Biofuels Margin Recovery: Monitor the operational status of the new biodiesel line and the receipt of the Arkansas state grant to assess if the negative gross margin in the biofuels segment is temporary.
- Legal Exposure: Track the resolution of the contractor default and trade association lawsuits to quantify potential liabilities.
- Customer Contract Renewals: Confirm the status of contracts for the bleach activator (expires 2013) and proprietary herbicide, which represent the majority of revenue.
- Feedstock Pricing: Monitor the spread between biodiesel selling prices and feedstock (animal fat/vegetable oil) costs, as this directly impacts the viability of the biofuels segment.