FutureFuel Corp. 10-Q Summary: Period Ended September 30, 2007
Business Context and Reporting Period
FutureFuel Corp. (formerly Viceroy Acquisition Corporation) filed this quarterly report for the period ended September 30, 2007. The company operates two primary segments: Chemicals (custom manufacturing and performance chemicals) and Biofuels (biodiesel production). The company was formed via a SPAC merger with Eastman SE, Inc. (renamed FutureFuel Chemical Company) in October 2006, acquiring the Batesville, Arkansas manufacturing plant. The filing notes a delay in submission due to a restatement of prior financials to apply purchase accounting.
Key Financial Metrics
| Metric (in thousands) | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Total Revenues | $46,558 | $42,211 | $125,685 | $111,991 |
| Gross Profit | $6,885 | $2,593 | $10,019 | $7,955 |
| Net Income | $3,343 | $1,151 | $4,210 | $964 |
| EPS (Diluted) | $0.10 | $0.04 | $0.13 | $0.03 |
| Cash & Equivalents | $54,063 | $143 | $54,063 | $143 |
| Operating Cash Flow (9M) | $19,103 | $72 | $19,103 | $72 |
| Capital Expenditures (9M) | $(14,419) | $(7,887) | $(14,419) | $(7,887) |
Liquidity & Debt: The company holds $54.1 million in cash and cash equivalents. As of September 30, 2007, there were no borrowings outstanding under its $50 million revolving credit facility. The company has a $3.2 million restricted cash balance held in financial assurance trusts for environmental obligations.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 10% in Q3 and 12% for the nine months ended September 30, 2007, compared to the prior year. This growth was driven by a 70% increase in biodiesel revenues (Q3) and a 100%+ increase (9M), alongside growth in CPOs and "other products."
- Segment Performance:
- Chemicals: Gross margins improved from 17% to 23% in Q3 and 14% to 18% for the nine months, driven by cost reduction efforts and fixed cost absorption by the biofuels segment. However, margins on the key NOBS product declined due to raw material costs.
- Biofuels: While revenues surged, the segment reported negative gross margins of $(1.4M) in Q3 and $(9.0M) for the nine months. Costs rose 25% in Q3 but lagged revenue growth due to a strategic shift from batch to continuous processing.
- Operating Expenses: Operating expenses decreased approximately 25% in Q3 and 33% for the nine months, primarily due to the elimination of corporate expense allocations from Eastman Chemical Company following the acquisition.
- Cash Flow: Operating cash flow improved dramatically to $19.1 million for the nine months, compared to $72,000 in the prior year, largely due to the collection of receivables previously held by Eastman Chemical and improved inventory management.
Outlook, Risks, and Management Commentary
- Production Strategy: Management is transitioning biodiesel production from batch processing to continuous processing to reduce fixed costs per gallon. Capacity increased from 750,000 gallons per quarter in 2006 to 6 million gallons per quarter in 2007.
- Contract Risks:
- NOBS: A key revenue driver (43% of Q3 revenue) is sold exclusively to Procter & Gamble under a contract expiring in June 2008. No assurance of renewal exists.
- Herbicide: The proprietary herbicide line faces generic competition, leading to a 10% price reduction in early 2007.
- Tolling: A significant biodiesel tolling agreement terminated on September 30, 2007, and was not renewed.
- Market Risks: The company is exposed to commodity price fluctuations (soybean oil, natural gas, electricity). A sensitivity analysis indicates a 10% adverse price change in soybean oil could decrease annual gross profit by 10.9%.
- Controls: The company disclosed material weaknesses in internal controls related to the acquisition accounting, which necessitated a restatement of prior periods. Management asserts these have been mitigated.
Investor Verification Checklist
- Contract Renewals: Verify the status of the NOBS supply agreement with Procter & Gamble, which expires in June 2008 and represents a significant portion of revenue.
- Biofuels Margins: Monitor the timeline for the biofuels segment to achieve positive gross margins as the transition to continuous processing completes.
- Restatement Impact: Review the Amendment No. 2 to Form 10 filed in February 2008 to understand the full scope of the accounting restatement regarding the Eastman SE acquisition.
- Commodity Hedging: Assess the effectiveness of the company's hedging strategies given the high sensitivity of gross profit to soybean oil and energy prices.
- Capital Allocation: Evaluate the sustainability of the $14.4 million in capital expenditures for the nine-month period against the $19.1 million operating cash flow.