FutureFuel Corp. 10-Q Summary: Period Ended September 30, 2010
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for FutureFuel Corp. for the period ended September 30, 2010. The company operates two primary segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production and distribution). The company also operates a granary for agricultural commodities. FutureFuel is an accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenues | $66.1 million | $165.6 million |
| Gross Profit | $11.9 million | $26.1 million |
| Net Income | $6.6 million | $13.0 million |
| Diluted EPS | $0.16 | $0.36 |
| Cash and Equivalents | $103.5 million (Balance Sheet) | N/A |
| Operating Cash Flow | N/A | $17.5 million |
| Total Debt | $0 (No borrowings outstanding) | $0 |
| Working Capital | $168.0 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 26% year-over-year for the quarter and 24% for the nine-month period. Chemical segment revenue grew 21% (quarter) and 28% (nine months), driven by increased demand for custom manufacturing and new agreements. Biofuels revenue grew 43% (quarter) and 11% (nine months) due to higher volumes and prices.
- Profitability Decline: Despite revenue growth, Net Income decreased 11% for the quarter ($6.6M vs $7.4M) and remained flat for the nine months ($13.0M vs $13.1M). This was primarily due to a significant margin compression in the Biofuels segment.
- Biofuels Segment Loss: The Biofuels segment reported a gross margin loss of $1.4 million for the quarter and $5.1 million for the nine months, compared to profits of $5.7 million and $4.2 million in the prior year periods. This is attributed to the expiration of the $1.00 per gallon federal blender's tax credit on December 31, 2009.
- Capital Structure: The company raised $70.7 million in financing activities through the exercise of warrants. It also paid $23.1 million in dividends. Cash and cash equivalents increased from $65.5 million to $103.5 million.
Outlook, Risks, and Contingencies
- Tax Credit Uncertainty: The company faces significant uncertainty regarding the future of biodiesel production due to the expiration of the federal blender's tax credit. Management suspended production and feedstock procurement in anticipation of a renewal that has not occurred. If the credit is not reinstated, the company may cease biodiesel production.
- Contingent Liability: A contingent liability of $2.0 million was recorded on the balance sheet, related to a dispute with a general contractor who defaulted on a plant construction project. The company has filed suit to recoup damages, but the contractor has counterclaimed.
- Legal Proceedings: The company is involved in a lawsuit against a biodiesel trade association regarding fees for health effects data required by the EPA. The association has filed a counter-suit for collection of fees.
- Market Risk: The company is exposed to commodity price risks for feedstock (animal fat, vegetable oils) and energy. A 10% adverse change in biodiesel feedstock prices could decrease annual gross profit by 5.3%.
Investor Verification Checklist
- Tax Credit Status: Verify the legislative status of the federal biodiesel blender's tax credit and its potential retroactive application to 2010.
- Biofuels Viability: Assess the company's ability to maintain positive margins in the biofuels segment without the $1.00/gallon credit, given current feedstock costs.
- Legal Exposure: Review the potential financial impact of the counterclaims from the defaulted general contractor and the biodiesel trade association.
- Customer Concentration: Confirm the stability of contracts with major customers, specifically the bleach activator customer (Procter & Gamble) and the proprietary herbicide customer (Arysta LifeScience), which together accounted for 47% of Q3 revenue.
- Investment Liquidity: Verify the liquidity status of the $2.8 million held in auction rate securities, which are classified as current assets but carry market risk.