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FutureFuel Corp. 10-K Summary (Fiscal Year Ended Dec 31, 2009)

Business Context and Reporting Period

FutureFuel Corp. is a Delaware corporation operating two primary business segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production and distribution). The company operates a manufacturing facility in Batesville, Arkansas, and a granary in Marianna, Arkansas. The reporting period covers the fiscal year ended December 31, 2009. The company is an accelerated filer with common stock quoted on the OTCBB under the symbol "FTFL."

Key Financial Metrics

Segment Performance (2009):

• Chemicals: Revenues of $143.8 million (73% of total); Gross Margin of $33.0 million.
• Biofuels: Revenues of $53.0 million (27% of total); Gross Margin of $1.4 million.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 1% to $196.7 million. While Biofuels revenue increased 24% (driven by higher biodiesel volumes and petrodiesel blends), Chemicals revenue decreased 8% due to lower volumes of bleach activator and herbicide sales.
• Profitability Decrease: Net income fell 25% to $17.0 million. This was driven by a decrease in operating cash flow and reduced hedging gains in the biofuels segment compared to 2008.
• Margin Compression: Biofuels gross margin dropped significantly from $7.7 million in 2008 to $1.4 million in 2009. This was attributed to higher distribution costs, lower hedging gains, and the expiration of the federal blender's tax credit at year-end.
• Liquidity Improvement: Cash and cash equivalents more than doubled to $65.5 million, primarily due to the liquidation of marketable securities and auction rate securities.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Strategy: Management intends to expand biodiesel capacity and pursue commercialization of biobased solvents. The company is making process changes to utilize high free fatty acid/low cost feedstock to produce fungible products suitable for pipelines.

Material Risks:

• Tax Credit Expiration: The federal blender's tax credit of $1.00 per gallon expired on December 31, 2009. Management states that if this credit is not renewed, it will have a material adverse effect on the biodiesel business, potentially resulting in negative gross margins and a cessation of production.
• Customer Concentration: Two customers (Procter & Gamble and Arysta LifeScience) accounted for approximately 53% of total revenues in 2009.
• Commodity Volatility: The company is exposed to fluctuations in feedstock prices (animal fats, vegetable oils) and energy costs.

Unusual Items:

• Inventory Write-down: A $1.7 million write-down was recorded for biodiesel and raw materials due to the expiration of the federal blender's credit reducing expected selling prices.
• 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 for health effects data.

Key Facts for Investor Verification

• Tax Credit Status: Verify the legislative status of the $1.00 per gallon federal biodiesel blender's tax credit, as its non-renewal poses an existential threat to the biofuels segment's profitability.
• Customer Contracts: Review the terms and renewal status of contracts with Procter & Gamble (bleach activator) and Arysta LifeScience (herbicide), which represent over half of total revenue.
• Feedstock Costs: Monitor the spread between biodiesel selling prices and feedstock costs (animal fats/vegetable oils) to assess margin sustainability without the tax credit.
• Warrant Repurchases: Note that the company repurchased and canceled 1.64 million warrants in 2009 for approximately $800,000, reducing potential dilution.
• Dividend Policy: The company declared a special cash dividend of $0.20 per share in March 2010, following $0.30 in 2009 and $0.70 in 2008. Verify future dividend sustainability given the margin pressures.