FutureFuel's Porky Piggy Bank

Fresh off release of financial results for the first quarter ending March 2021, FutureFuel (FF:  NYSE) leadership has declared a special cash dividend.  Shareholders with stock in their grasp as of May 21^st will be rewarded with a payment of $2.50 per share.  The team is apparently confident in sales of the Company's various specialty polymers, renewable chemicals and biofuel.  Then again a porky piggy bank may have something to do with it.  According to the quarter report FutureFuel has built up a cash hoard of $194 million at the end of March 2021. 

The special dividend will soak up about $110 million of the company’s coin.  Will FutureFuel have enough cash left over to pursue new growth opportunities?

In the March 2021 quarter, the company used $14.3 million of its cash hoard to support operations.  This was primarily due to the $8.8 million net loss in first three months of the year.  Management let inventories build up by $11.4 million, locking up working capital during the quarter.  However, the quarter only a blip in time.  Historically, FutureFuel’s operations have pumped out cash flow year after year.  Indeed, looking back twelve months, operations generated $78.0 million in cash flow.  Consequently, the company has been sitting on a mound of cash that reached $215 million at the peak at the end of December 2018.

True enough FutureFuel must be prepared to withstand some adverse market cycles.  What is more, the chemicals business is not immune to nature’s vagaries.  The company needs plenty of working capital, including cash, to last through such events.

In the first quarter 2021, shareholders had the chance to see the ramifications of both natural and cyclic forces.  Of course, virtually every business around the world is struggling against the coronavirus pandemic that has taken millions of lives and forced governments to adopt draconian work stoppage and restricted travel policies.  Just as many companies were glimpsing the light at the end of that dark tunnel, Winter Storm Uri disrupted natural gas production in the Texas market from where FutureFuel sources natural gas for its processes.  Natural gas prices increased dramatically.  FutureFuel experienced increased costs for natural gas purchases as well as due to the shutdown and restart of production facilities in the Texas area.

With adequate reserves for working capital, FutureFuel still needs cash for investment in growth projects.  Besides biodiesel, the company develops and produces specialty chemicals, some on order for customers and others for a standard product portfolio.  It produces a mix of glycerin, solvents, coatings, and chemical intermediaries.  Whatever new products its engineers’ are conjuring up on their work benches, the company is keeping the details close to the ‘corporate vest.’  FutureFuel is not known for its public relations efforts and there are no analysts who have published estimates for the company’s coming performance.  

We can observe that in the first quarter 2021, spending on research and development was $774,000 or 1.8% of total sales.  As paltry as that figure might seem, it actually represents a step up from FutureFuel’s three-year R&D spending rate of 1.4% of total sales.

Investor should perhaps be more concerned about the company’s growth prospects rather than the cash balance after a special dividend.  It rarely ends well when a company stops innovating.

 

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.