FutureFuel Corp. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for FutureFuel Corp. for the three and six-month periods ended June 30, 2009. FutureFuel operates two primary segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production). The company operates a manufacturing facility in Batesville, Arkansas, and recently completed a capacity expansion project for its biodiesel line, initiating commercial production in May 2009.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2009 | 6 Months Ended June 30, 2009 | 6 Months Ended June 30, 2008 |
|---|---|---|---|
| Total Revenues | $41,831 | $81,568 | $93,116 |
| Gross Profit | $5,873 | $12,228 | $15,033 |
| Net Income | $2,850 | $5,671 | $9,073 |
| Diluted EPS | $0.10 | $0.20 | $0.34 |
| Cash and Equivalents | $56,191 | $56,191 | $1,584 |
| Operating Cash Flow | N/A | $4,712 | $9,607 |
| Investing Cash Flow | N/A | $24,024 | $(62,678) |
| Total Debt | $0 | $0 | $0 |
Note: The company has a $50 million revolving credit facility but had no borrowings outstanding as of June 30, 2009.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 16% in Q2 2009 and 12% in the first half of 2009 compared to the prior year.
- Chemicals: Revenues dropped 18% (Q2) and 12% (6 months). Significant declines were seen in CPOs (-82% Q2) and DIPBs (-58% Q2) due to automotive industry slowdowns and customer inventory adjustments.
- Biofuels: Revenues dropped 12% (Q2) and 13% (6 months) due to lower market prices for diesel/biodiesel, despite a 53% increase in sales volume in Q2.
- Profitability: Net income decreased 2% in Q2 and 37% in the first half of 2009. The decline in the first half was driven by lower operating income and a significant reduction in non-operating income (interest income and foreign currency gains) compared to 2008.
- Liquidity: Cash and cash equivalents increased significantly from $27.5 million at year-end 2008 to $56.2 million at June 30, 2009. This was driven by strong investing cash flows from the sale of marketable securities and auction rate securities.
- Segment Margins: The Biofuels segment reported a gross margin loss of $458,000 in Q2 2009, compared to a loss of $2.5 million in Q2 2008, indicating improved operational efficiency despite lower prices.
Outlook, Risks, and Management Commentary
- Capacity Expansion: A new continuous processing line for biodiesel began commercial production in May 2009, increasing annual capacity to approximately 59 million gallons. Production reached 80% of nameplate capacity by the end of Q2.
- Government Incentives: The company received $2.0 million in funding from the Arkansas Alternative Fuels Development Program in July 2009 (post-period end). This will be recognized as a credit to cost of goods sold in Q3 2009, improving margins in that quarter.
- Market Risks:
- Commodity Prices: Gross profit is sensitive to feedstock (animal fat) and electricity prices. A 10% adverse price change in animal fat could decrease annual gross profit by 9%.
- Customer Concentration: The bleach activator and proprietary herbicide products account for over 50% of chemical revenues. Demand is tied to specific customer priorities and generic competition.
- Regulatory: The $1 per gallon federal biodiesel blender credit is set to expire at the end of 2009, creating uncertainty for future biofuels profitability.
- Legal Proceedings: The company is involved in litigation with a former general contractor regarding a plant construction default and a biodiesel trade association regarding health effects data fees. Management believes these will not have a material adverse effect on financial condition.
Investor Verification Checklist
- Auction Rate Securities: Verify the liquidity status of the $11.8 million in auction rate securities held as current assets, given market volatility in this sector.
- Arkansas Grant Recognition: Confirm the timing and accounting treatment of the $2.0 million state grant expected to be recognized in Q3 2009.
- Customer Concentration: Assess the risk associated with the top two chemical products (bleach activator and herbicide) representing over half of chemical revenues.
- Derivative Exposure: Review the net liability of $1.1 million in derivative instruments and the impact of fair value changes on future earnings volatility.
- Capital Expenditures: Monitor the utilization of the new biodiesel processing line and the return on the $10 million investment in the antimicrobial intermediate plant.