FutureFuel Corp. 10-Q Summary: Quarter Ended March 31, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for FutureFuel Corp., a Delaware corporation operating through its subsidiary, FutureFuel Chemical Company. The company operates two primary segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production). The reporting period covers the three months ended March 31, 2008. The company is classified as a non-accelerated filer and a smaller reporting company.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Revenues | $43.22 million | $37.51 million |
| Gross Profit | $10.58 million | ($2.45 million) Loss |
| Net Income | $6.16 million | ($2.04 million) Loss |
| Earnings Per Share (Diluted) | $0.23 | ($0.08) |
| Operating Cash Flow | $5.31 million | $4.80 million |
| Cash and Equivalents (End of Period) | $34.31 million | $61.82 million |
| Total Debt | $0 | $0 |
Liquidity: The company holds $34.3 million in cash and cash equivalents and $37.1 million in marketable debt securities (including $16.9 million in auction rate securities). There are no borrowings outstanding under its $50 million credit facility.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 15% year-over-year, driven by a 143% surge in biofuels revenue and a 36% increase in proprietary herbicide sales. Chemical segment revenue grew modestly, offset by a 44% decline in DIPB (chemical intermediate) sales due to housing market weakness.
- Profitability Turnaround: The company swung from a net loss of $2.04 million in Q1 2007 to a net income of $6.16 million in Q1 2008. Gross margin improved significantly from a negative 6.5% to 24.5%.
- Biofuels Segment: The biofuels segment moved from a gross loss of $7.9 million in Q1 2007 to a gross profit of $2.1 million in Q1 2008. This was primarily due to a $2.0 million state grant, a shift to more efficient continuous processing, and a $252,000 hedging gain (compared to a $4.0 million hedging loss in the prior year).
- Investing Activities: Net cash used in investing activities increased to $25.7 million (from $6.1 million) due to a net purchase of $21.9 million in marketable securities (U.S. Treasuries and auction rate securities).
Outlook, Risks, and Unusual Items
- Guidance & Outlook: Management anticipates stable demand for bleach activators and strong demand for herbicides through 2008. They expect moderate demand recovery for DIPB in the second half of 2008. The company plans to expand biodiesel capacity to 59 million gallons per year by the end of 2008.
- Unusual Items: The Q1 2008 results were favorably impacted by a one-time $2.0 million grant from the State of Arkansas for biodiesel production. Additionally, the company recognized a $252,000 gain on hedging activities, contrasting sharply with a $4.0 million loss in the prior year.
- Risks & Contingencies:
- Contractor Default: A general contractor defaulted on a fixed-price agreement to construct a new processing plant. FutureFuel has assumed the contractor role, but the financial impact is currently undetermined.
- Auction Rate Securities: The company holds $16.9 million in auction rate securities. While currently classified as current assets, liquidity risks exist if auctions fail, potentially forcing the company to hold these securities until maturity.
- Commodity Price Risk: The company is exposed to fluctuations in animal fat, electricity, coal, and caustic soda prices, which could reduce gross profit if not passed through to customers.
Investor Verification Checklist
- Grant Sustainability: Verify the timing and likelihood of future state grants, as the $2.0 million received in Q1 2008 was a significant driver of biofuels profitability.
- Auction Rate Liquidity: Assess the current market status of the $16.9 million in auction rate securities and the potential for liquidity constraints if auctions fail.
- Contractor Default Impact: Monitor updates regarding the defaulted construction contract to determine potential cost overruns or delays.
- DIPB Market Recovery: Evaluate the trajectory of the housing and building industries to gauge the recovery of DIPB sales volumes.
- Customer Concentration: Note that the bleach activator and proprietary herbicide together accounted for 66% of total revenue; monitor the stability of these key contracts.