FutureFuel Corp. 10-Q Summary: Period Ended June 30, 2010
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for FutureFuel Corp. for the period ended June 30, 2010. The company operates two primary segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production and distribution). The company is headquartered in St. Louis, Missouri, with its primary manufacturing facility located in Batesville, Arkansas. As of August 9, 2010, there were 39,973,849 shares of common stock outstanding.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Revenues | $99,477,000 | $81,568,000 |
| Gross Profit | $14,243,000 | $12,228,000 |
| Net Income | $6,422,000 | $5,671,000 |
| Diluted EPS | $0.19 | $0.20 |
| Operating Cash Flow | $7,814,000 | $4,712,000 |
| Cash and Equivalents (End of Period) | $115,884,000 | $56,191,000 |
| Total Debt | $0 | $0 |
| Working Capital | $165,160,000 | $102,690,000 |
Note: All figures in thousands except per share data. Working Capital calculated as Current Assets minus Current Liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 22% year-over-year (YoY) for the six-month period, driven primarily by a 32% increase in the Chemicals segment ($83.9M vs $63.7M). Conversely, Biofuels revenue declined 13% ($15.6M vs $17.9M).
- Profitability: Net income increased 13% YoY to $6.4M. However, the Biofuels segment reported a gross loss of $3.7M for the six months, compared to a loss of $0.4M in the prior year. This deterioration is attributed to the expiration of the federal blender's tax credit.
- Liquidity: Cash and cash equivalents increased significantly from $65.5M to $115.9M. This was driven by $68.0M in proceeds from stock issuances (warrant exercises) and strong operating cash flow, partially offset by $15.1M in dividend payments.
- Inventory: Inventory levels rose to $29.3M from $26.4M, reflecting a build-up of biodiesel feedstock and finished product inventory due to the inability to sell biodiesel at acceptable margins without the tax credit.
Outlook, Risks, and Management Commentary
- Tax Credit Expiration: The most significant risk factor is the expiration of the $1.00 per gallon federal blender's tax credit on December 31, 2009. Management states that without renewal, biodiesel production costs increase by $1.00/gallon, potentially resulting in negative production margins and a cessation of biodiesel production.
- Segment Performance: The Chemicals segment remains the primary profit driver, with strong growth in custom manufacturing and industrial intermediates. The Biofuels segment is currently unprofitable due to the tax credit lapse, though the company continues to produce in anticipation of a potential renewal.
- Legal Contingencies: The company is involved in litigation regarding a defaulted general contractor for a processing plant construction project and a dispute with a biodiesel trade association regarding fees for health effects data. Management cannot currently determine the financial impact of these matters.
- Capital Management: The company maintains a risk-averse approach to its excess working capital, holding funds primarily in cash, cash equivalents, and preferred/trust preferred securities. A $50 million credit facility is available but currently has no outstanding borrowings.
Investor Verification Checklist
- Tax Credit Status: Verify the current legislative status of the federal biodiesel blender's tax credit and its potential renewal timeline.
- Biofuels Margin Sensitivity: Assess the company's ability to maintain biodiesel operations if the tax credit is not reinstated, given the reported negative gross margins in the segment.
- Customer Concentration: Review the dependency on specific customers for the "bleach activator" and "proprietary herbicide" products, which together accounted for 55% of chemical revenues in the first half of 2010.
- Legal Exposure: Monitor the resolution of the lawsuit against the defaulted general contractor and the biodiesel trade association dispute.
- Inventory Valuation: Confirm the valuation of the increased biodiesel inventory, which was adjusted to exclude the federal blender's credit value.