FutureFuel Corp. 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
FutureFuel Corp. (FutureFuel) is 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). This report covers the unaudited financial results for the three and nine months ended September 30, 2008, compared to the same periods in 2007. The company is classified as a non-accelerated filer.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $60,585 | $153,701 |
| Gross Profit | $10,880 | $25,912 |
| Net Income | $5,389 | $14,462 |
| Diluted EPS | $0.19 | $0.53 |
| Operating Cash Flow | N/A | $27,029 |
| Cash and Equivalents (Sep 30, 2008) | $27,427 | |
| Marketable Debt & Auction Rate Securities | $57,519 | |
| Debt Outstanding (Line of Credit) | $343 |
Note: All financial figures are in thousands of dollars unless otherwise noted.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 30% for the quarter and 22% for the nine-month period compared to 2007. This was driven primarily by the Biofuels segment, which saw a 72% increase in quarterly revenue and a 97% increase for the nine-month period.
- Profitability: Net income rose 61% for the quarter and 243% for the nine-month period. The Biofuels segment turned profitable in the third quarter of 2008, contrasting with a loss in the same period in 2007, aided by hedging gains and economies of scale.
- Investment Portfolio: The company significantly increased its holdings in marketable debt and auction rate securities, rising from $15,086 at year-end 2007 to $57,519 at September 30, 2008. This included $25,619 in auction rate securities.
- Cost Structure: Cost of goods sold increased 25% for the quarter, largely due to higher raw material prices, though contractual adjustments allowed the company to pass most costs to customers with a one-quarter lag.
Guidance, Outlook, and Risks
- Dividend Declaration: On October 1, 2008, the company declared a special cash dividend of $0.70 per share, payable November 11, 2008.
- Capacity Expansion: Management plans to increase biodiesel production capacity to 59 million gallons per year by Q1 2009 via a second continuous processing line.
- Tax Credit Risk: The $1.00 per gallon federal biodiesel excise tax credit expires December 31, 2009. Management warns that if not extended, production costs will rise significantly, potentially rendering biodiesel production unprofitable and forcing a cessation of operations in that segment.
- Market Risks: The company faces risks related to the contraction of the U.S. biodiesel manufacturing base, potential anti-dumping complaints from the European Commission, and volatility in feedstock prices (animal fat, vegetable oils).
- Litigation: The company is involved in disputes regarding a defaulted construction contract and a customer default on a biodiesel purchase agreement. Management does not currently expect these to have a material adverse effect.
Investor Verification Checklist
- Auction Rate Securities Liquidity: Verify the current market status and liquidity of the $25.6 million in auction rate securities held, given the market freeze in this asset class during late 2008.
- Dividend Impact: Assess the impact of the $0.70 per share special dividend on the company's remaining cash reserves and working capital.
- Tax Credit Extension: Monitor legislative developments regarding the extension of the federal biodiesel tax credit beyond December 31, 2009.
- Customer Concentration: Review the dependency on key customers for the bleach activator and proprietary herbicide, which together accounted for 51% of Q3 revenues.
- Raw Material Hedging: Evaluate the effectiveness of the company's hedging strategy in mitigating the volatility of animal fat and energy prices.