Flotek Industries, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Flotek supplies energy-related chemistries, drilling and production technologies, and consumer and industrial chemistries. Results are unaudited.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $72.3 million | $87.0 million | $144.6 million | $169.4 million |
| Gross profit / margin | $23.9 million / 33.1% | $29.3 million / 33.6% | $48.8 million / 33.8% | $55.8 million / 32.9% |
| Operating loss | $2.7 million | $18.6 million | $48.7 million | $19.9 million |
| Net loss | $2.3 million | $12.5 million | $32.5 million | $14.1 million |
| Loss per diluted share | $0.04 | $0.23 | $0.59 | $0.26 |
- Q2 revenue declined 16.9% year over year; first-half revenue declined 14.6%. The company attributed the declines mainly to weaker oilfield activity and price pressure.
- Q2 operating loss improved from the prior year, which included a $20.4 million impairment charge. First-half 2016 results included $40.4 million of inventory and long-lived-asset impairment charges, recorded in Q1; the filing reports no Q2 impairment charge.
- Six-month operating cash flow was negative $3.4 million, versus positive $11.3 million in 2015. Investing cash use was $8.3 million, including $9.0 million of capital expenditures. Financing provided $13.2 million, and cash increased $1.6 million to $3.8 million.
- At June 30, total debt was $64.9 million: $43.1 million drawn on the revolver and $21.8 million on the term loan. Debt was $50.5 million at December 31, 2015. Total liquidity, including $12.9 million of available revolver capacity, was $16.7 million.
- Total assets were $365.3 million and equity was $266.6 million at June 30. Current liabilities were $83.5 million and current assets were $153.6 million.
Material changes and segment performance
- North American average active rigs fell 53.2% in Q2 and 56.6% in the first half versus 2015. Flotek said depressed oilfield activity was pressuring customer demand and pricing.
- Energy Chemistry Technologies revenue fell 23.2% in Q2; however, CnF chemistry sales volumes rose 16.2% year over year. Segment gross margin increased to 40.7% from 36.2%.
- Consumer and Industrial Chemistry Technologies revenue rose 33.7% in Q2, but segment gross margin declined to 19.6% from 26.7%, reflecting higher raw-material costs and lower-margin inventory liquidation.
- Drilling Technologies revenue fell 48.3% in Q2. The segment reported a $1.6 million operating loss, excluding Q2 impairment; cost reductions included staffing cuts and location closures.
- Production Technologies revenue fell 32.0% in Q2 and gross margin was negative 0.7%. The segment is shifting toward newer hydraulic pumping unit and electric submersible pump offerings.
Outlook, risks and unusual items
- Management expected North American oilfield activity to remain depressed through the rest of 2016 and potentially beyond, while continuing to market its energy products and pursue cost reductions. No consolidated revenue or earnings guidance was provided.
- Flotek projected 2016 capital expenditures of $14–$16 million, including approximately $7 million for its Global Research & Innovation Center. It expected to spend $5–$7 million in the remainder of 2016.
- A March 2016 credit-facility amendment suspended fixed-charge-coverage and funded-debt-to-adjusted-EBITDA covenants until June 30, 2017, but imposed minimum adjusted EBITDA tests for specified quarters, minimum availability requirements, and a 2016 capital-spending limit. The amendment also increased borrowing rates by 1 percentage point.
- Goodwill testing found no impairment, but valuation depended on assumptions about oilfield-market recovery, including projected rig-count improvements. Management warned a deeper or prolonged downturn could lead to further impairment.
- The company faces consolidated securities class-action litigation, derivative lawsuits, and an SEC inquiry concerning similar issues. Flotek disputes the claims; the filing says the outcome could not be reasonably estimated.
- Oil and gas industry exposure, customer concentration, citrus-terpene supply and price volatility, interest rates, and the company’s limited liquidity are material risks. Two customers represented 27.3% of Q2 revenue and 29.6% of first-half revenue.
Key facts for investors to verify
- Whether operating cash flow and liquidity can support debt service, working capital and planned capital expenditures under the credit facility’s amended requirements.
- Whether CnF volume growth and new production-technology products can offset continued oilfield weakness and segment pricing pressure.
- Whether management’s impairment assumptions remain supportable if rig activity recovers more slowly than projected.
- Developments and potential financial consequences of the lawsuits and SEC inquiry, which were not estimable in this filing.
- Whether actual capital spending, including completion of the Houston research center, remains within the stated outlook and facility limits.