FutureFuel Corp. Q1 2011 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011. FutureFuel Corp. operates two primary segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production). The company operates a manufacturing facility in Batesville, Arkansas, and maintains a distribution network in the region. As of May 9, 2011, there were 39,983,849 shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands) | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $55,241 | $47,763 |
| Net Income | $2,716 | $3,659 |
| Earnings Per Share (Diluted) | $0.07 | $0.12 |
| Gross Profit | $4,999 | $7,941 |
| Operating Cash Flow | $22,966 | $1,381 |
| Cash and Equivalents (End of Period) | $79,363 | $104,595 |
| Total Debt | $0 | $0 |
Note: All financial figures are in thousands of dollars unless otherwise noted.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 16% year-over-year. The Biofuels segment saw a 153% revenue increase, while the Chemicals segment grew 3%.
- Profitability Decline: Despite revenue growth, Net Income decreased 26% to $2.7 million. Gross profit margin contracted significantly due to rising costs in the biofuels segment.
- Derivative Losses: The company recognized a $3.75 million loss on derivative instruments in Q1 2011, compared to a $400,000 loss in Q1 2010. These losses are recorded in Cost of Goods Sold and contributed to the decline in gross profit.
- Cash Flow Improvement: Operating cash flow surged to $22.9 million, primarily driven by the collection of the $1.00 per gallon biodiesel blender's tax credit receivable and timing of inventory payments.
- Dividend Payment: The company paid a special cash dividend of approximately $4.0 million ($0.10 per share) in Q1 2011, compared to no dividend in Q1 2010.
Outlook, Risks, and Management Commentary
- Biofuels Uncertainty: Management states there is uncertainty regarding future biodiesel production due to feedstock price volatility, the expiration of the federal blender's tax credit on December 31, 2011, and the status of government mandates.
- Operational Adjustments: The company is currently debugging a redesigned continuous processing line intended to produce biodiesel from high fatty acid feedstock, as low fatty acid feedstock became too costly following the 2009 tax credit expiration.
- Legal Contingencies: The company is involved in litigation regarding a defaulted general contractor for a customer plant construction project and a dispute with a biodiesel trade association regarding fees. Management cannot currently determine the financial impact of these matters.
- Market Risk: The company is exposed to commodity price risks (animal fat, diesel, natural gas). A hypothetical 10% adverse price change in animal fat could decrease annual gross profit by 7.7%.
- Capital Allocation: The company intends to fund future capital requirements from cash flow and existing investments, with no immediate need to issue new securities.
Investor Verification Checklist
- Tax Credit Dependency: Verify the status and renewal likelihood of the federal biodiesel blender's tax credit, which is critical to the biofuels segment's margin.
- Derivative Exposure: Review the specific hedging strategies and the potential for continued volatility in net income due to mark-to-market accounting on derivatives.
- Customer Concentration: Assess the risk associated with the bleach activator and proprietary herbicide contracts, which together accounted for 49% of total revenue.
- Legal Proceedings: Monitor the resolution of the lawsuit against the defaulted general contractor and the biodiesel trade association dispute.
- Feedstock Costs: Track the spread between feedstock costs (animal fat/vegetable oils) and biodiesel selling prices to evaluate the viability of the biofuels segment.