FF

FutureFuel Corp. 10-Q Summary: Period Ended June 30, 2008

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, 2008. 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 is classified as a non-accelerated filer. As of August 14, 2008, there were 26,800,000 shares of common stock outstanding.

Key Financial Metrics

Note: All figures are in thousands of dollars unless otherwise noted. The company had no borrowings outstanding under its $50 million credit facility as of June 30, 2008.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 18% year-over-year (YoY) for the six-month period, driven primarily by a 124% increase in Biofuels revenue ($20.4M vs. $9.1M). Chemicals revenue remained relatively stable, increasing 4%.
• Profitability Surge: Net income increased significantly from $867,000 to $9.073 million. This was driven by higher gross margins in the chemicals segment and improved biofuels volume, partially offset by hedging losses.
• Cash Position: Cash and cash equivalents decreased dramatically from $54.7 million to $1.6 million. This reduction was due to significant investing activities, specifically the purchase of $58.9 million in auction rate securities and $25.0 million in other marketable debt securities.
• Segment Performance:
  • Chemicals: Gross margin improved to $15.4 million (YoY $10.7M) due to cost reduction efforts and volume allocation shifts.
  • Biofuels: Reported a gross margin loss of $0.4 million (YoY loss of $7.6M). However, management notes the segment was profitable on a fully allocated basis excluding $4.3 million in hedging losses.

Guidance, Outlook, and Risks

• Biodiesel Tax Credit Risk: A critical risk factor is the expiration of the federal $1.00 per gallon biodiesel excise tax credit on December 31, 2008. Management states that if this credit is not extended, production costs will rise, potentially resulting in negative margins and a cessation of biodiesel production.
• Feedstock Costs: High feedstock costs (e.g., soybean prices up 86% YoY) are causing industry-wide contraction. Management notes that 275 million gallons of U.S. biodiesel capacity has been halted or suspended since January 2008.
• Expansion Plans: The company plans to increase biodiesel production capacity to 59 million gallons per year by Q1 2009 via a second continuous processing line.
• Legal Contingency: The company is involved in litigation with a general contractor who defaulted on a fixed-price plant construction agreement. The financial impact of this dispute is currently undetermined.
• Investment Liquidity: The company holds $59 million in auction rate securities. While currently classified as current assets due to perceived liquidity, management acknowledges the risk of auction failures in the broader market.

Investor Verification Checklist

• Tax Credit Status: Verify the legislative status of the federal biodiesel tax credit extension beyond December 31, 2008.
• Auction Rate Securities: Confirm the current liquidity status and fair value of the $58.9 million investment in auction rate securities given market volatility.
• Hedging Impact: Review the timing of hedging losses ($4.3M) and their correlation to physical inventory sales to understand future margin volatility.
• Contractor Litigation: Monitor updates on the lawsuit against the defaulted general contractor for potential financial exposure.
• Feedstock Pricing: Track raw material costs (animal fat, soybeans) relative to biodiesel selling prices to assess margin sustainability without the tax credit.