FutureFuel Corp. 10-Q Summary: Period Ended June 30, 2007
Business Context and Reporting Period
FutureFuel Corp. (formerly Viceroy Acquisition Corporation) filed this Quarterly Report on Form 10-Q for the period ended June 30, 2007. The company operates two primary segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production). The company was formed in 2005 and acquired FutureFuel Chemical Company (formerly Eastman SE, Inc.) in October 2006. The filing notes that the company is a non-accelerated filer and a smaller reporting company. As of the filing date (March 3, 2008), the company disclosed delays in filing due to a restatement of financial statements related to the acquisition accounting.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $41.62 million | $79.13 million |
| Gross Profit | $5.58 million | $3.13 million |
| Net Income | $2.91 million | $0.87 million |
| Operating Cash Flow | N/A | $8.34 million |
| Cash and Equivalents | $62.92 million | $62.92 million |
| Total Debt | $0 | $0 |
| Capital Expenditures | N/A | $(9.81 million) |
Note: All figures in millions unless otherwise noted. The company had no borrowings outstanding under its $50 million credit facility as of June 30, 2007.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 20% in Q2 2007 compared to Q2 2006 ($41.6M vs. $34.7M) and 13% for the six-month period ($79.1M vs. $69.8M). This growth was driven by the Biofuels segment (up nearly 200% in Q2) and increases in proprietary herbicides, CPOs, and SSIPA/LiSIPA chemicals.
- Profitability: The company reported a Net Income of $2.91 million for Q2 2007, a significant improvement from the $1,000 net income in Q2 2006. For the six-month period, Net Income was $0.87 million compared to a Net Loss of $0.19 million in the prior year.
- Segment Performance:
- Chemicals: Generated $34.4M in Q2 revenue with a gross margin of $5.27M. Margins improved for most products except NOBS, where costs rose due to raw material price increases.
- Biofuels: Generated $7.2M in Q2 revenue with a gross margin of $0.31M. The segment transitioned from batch to continuous processing, reducing per-gallon costs despite a 27% increase in total costs.
- Operating Expenses: Decreased approximately 48% in Q2 2007 compared to Q2 2006, primarily due to the elimination of corporate expense allocations from Eastman Chemical Company following the acquisition.
Outlook, Risks, and Management Commentary
- Guidance: The filing does not provide specific numerical guidance for future periods. Management notes that future results depend on consumer demand for key products (NOBS, herbicides) and the ability to pass on raw material cost increases.
- Contract Risks: The NOBS supply agreement with Procter & Gamble expires in June 2008 with no assurance of renewal. The proprietary herbicide contract faces generic competition, though a price increase was implemented in June 2007 to offset raw material costs.
- Biofuels Strategy: The company is transitioning to continuous processing to improve efficiency. A tolling agreement for biodiesel production terminated on September 30, 2007, and was not renewed.
- Market Risks: The company is exposed to commodity price fluctuations (acetic anhydride, natural gas, soybean oil). A 10% adverse price change in key inputs could reduce annual gross profit by up to 4.1% (acetic anhydride). The company uses futures and options to hedge biofuel sales but does not designate them as accounting hedges, leading to potential earnings volatility.
- Restatement Disclosure: Management disclosed that the report was not filed timely due to a restatement of financial statements to apply purchase accounting to the Eastman SE acquisition. Material weaknesses in internal controls were identified and are being mitigated.
Investor Verification Checklist
- Restatement Impact: Verify the details of the restatement mentioned in the "Controls and Procedures" section and its effect on prior period comparability.
- NOBS Contract Renewal: Monitor the status of the NOBS supply agreement with Procter & Gamble, which expires in June 2008 and represents a significant portion of revenue.
- Biofuels Margin Sustainability: Assess whether the transition to continuous processing will sustainably improve biofuels gross margins, which were negative for the six-month period ($-7.6M).
- Raw Material Hedging: Review the effectiveness of hedging strategies given the volatility in energy and agricultural commodity prices.
- Capital Expenditures: Confirm the utilization of the $50 million credit facility, as the company spent $9.8 million on CapEx in the first half of 2007 with no current borrowings.