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FutureFuel Corp. 10-Q Summary: Quarter Ended March 31, 2010

Business Context and Reporting Period

This is a quarterly report (Form 10-Q) for FutureFuel Corp. for the three-month period ended March 31, 2010. The company operates two primary segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production and distribution). The company is an accelerated filer based in St. Louis, Missouri, with its primary manufacturing facility located in Batesville, Arkansas.

Key Financial Metrics

Segment Performance: Chemicals revenue was $43.6 million (91% of total) with a gross profit of $9.2 million. Biofuels revenue was $4.2 million (9% of total) with a gross loss of $1.3 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 20% year-over-year, driven primarily by a 22% increase in the Chemicals segment. Biofuels revenue increased 7%.
• Profitability: Net income rose 30% to $3.66 million. The effective tax rate was 38.2% compared to 37.4% in the prior year.
• Cash Position: Cash and cash equivalents increased significantly from $65.5 million to $104.6 million, largely due to $45.8 million in proceeds from stock issuance (warrant exercises).
• Operating Cash Flow Decline: Cash provided by operating activities decreased 48% to $1.38 million. This was primarily due to a $2.97 million increase in accounts receivable and a $3.7 million decrease in accounts payable.
• Investing Activities: The company shifted from a net cash provider in investing activities ($27.2M in 2009) to a net user ($8.1M in 2010), driven by the purchase of preferred stock and trust preferred securities ($6.0M) and capital expenditures ($2.4M).

Outlook, Risks, and Management Commentary

• Biodiesel Tax Credit Expiration: A critical risk factor is the expiration of the $1.00 per gallon federal blender's tax credit on December 31, 2009. Management notes that without renewal, biodiesel production costs would increase, potentially resulting in negative margins and a cessation of biodiesel production.
• Biofuels Segment Performance: Biodiesel sales volume decreased 69% in Q1 2010 compared to Q1 2009 due to the tax credit expiration. The segment reported a gross loss of $1.3 million, exacerbated by a $400,000 loss on hedging activities and an inventory write-down.
• Chemicals Segment: Revenue from the bleach activator increased 23% due to higher volumes. However, revenue from the proprietary herbicide decreased 18% due to lower volumes. CPO revenues increased over 100% as demand returned after an inventory build-up by the customer in late 2008.
• Legal Proceedings: The company is involved in litigation with a former general contractor regarding a defaulted construction project and a biodiesel trade association regarding fees and dues. Management states the financial impact of these matters cannot currently be determined.
• Dividend: A special cash dividend of $0.20 per share was declared and paid in April 2010.

Investor Verification Checklist

• Tax Credit Status: Verify the legislative status of the federal biodiesel blender's tax credit, as its absence directly threatens the viability of the biofuels segment.
• Customer Concentration: Review the dependency on the bleach activator and proprietary herbicide contracts, which together accounted for 61% of total revenue.
• Working Capital Trends: Investigate the reasons for the significant increase in accounts receivable and decrease in accounts payable, which negatively impacted operating cash flow.
• Legal Exposure: Monitor the outcomes of the lawsuits against the general contractor and the biodiesel trade association for potential financial liabilities.
• Investment Liquidity: Assess the liquidity and fair value of the $13 million in marketable and auction rate securities held by the company.