Flotek Industries, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Flotek supplies energy-related chemistry, drilling and production technologies, and consumer and industrial chemicals. Results were sharply affected by the oilfield downturn and a substantial impairment charge.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $72.3 million | $82.4 million |
| Gross profit / margin | $24.9 million / 34.5% | $26.5 million / 32.2% |
| Operating loss | $46.0 million | $1.3 million |
| Net loss | $30.2 million | $1.5 million |
| Loss per diluted share | $0.55 | $0.03 |
| Cash used in operating activities | $6.6 million | Cash provided: $6.2 million |
| Capital expenditures | $4.2 million | $5.6 million |
Revenue declined 12.2% year over year. Gross margin improved, largely from a higher mix of higher-margin CnF chemistry sales. The $40.4 million impairment charge—$16.6 million for inventory and $23.9 million for long-lived assets—was the principal driver of the operating loss. Excluding impairment, Drilling Technologies reported a $4.4 million operating loss and Production Technologies a $1.5 million operating loss; these are company-presented segment measures, not consolidated adjusted earnings.
Segments and key changes
- Energy Chemistry Technologies: Revenue decreased 4.2% to $44.7 million; operating income rose to $8.0 million. CnF sales volume increased 138% year over year, while non-CnF revenue fell about 64%.
- Consumer and Industrial Chemistry Technologies: Revenue increased 42.1% to $19.1 million, supported by higher terpene prices and volumes. Gross margin slipped to 26.3% from 27.5% as orange-oil input costs rose.
- Drilling Technologies: Revenue fell 65.5% to $6.5 million; the segment recorded $36.5 million of impairments and a $41.0 million operating loss. Excluding impairment, its operating loss was $4.4 million.
- Production Technologies: Revenue fell 43.4% to $2.0 million. Inventory impairment was $3.9 million; the operating loss was $5.4 million, or $1.5 million excluding impairment.
- Average North American rig count fell 57.8% year over year. Management cited weak activity, customer spending cuts, price pressure, and changing drilling methods.
Cash, debt, and liquidity
At March 31, cash was $2.5 million, total debt was $61.2 million ($37.6 million revolver and $23.6 million term loan), and net debt was $58.8 million. Current liabilities were $80.0 million versus current assets of $154.4 million. Cash from operations was negative despite significant noncash impairment add-backs; working capital consumed $16.5 million, including cash use from higher inventory and income taxes receivable. Financing provided $10.5 million, primarily through net borrowing.
Available revolver capacity, after required availability, was $17.4 million; management reported total liquidity of $19.9 million including cash. A March 31 credit amendment suspended fixed-charge coverage and funded-debt-to-adjusted-EBITDA covenants until June 30, 2017, but established minimum adjusted EBITDA requirements for specified later 2016 and 2017 periods, minimum revolver availability requirements, and a 2016 capital-expenditure limit of approximately $25 million. Interest rates increased by 1 percentage point. The revolver is classified as current debt.
Outlook, risks, and unusual items
- Management expected North American oilfield activity to remain depressed through the rest of 2016 and potentially beyond. It anticipated 2016 capital spending of $15–$20 million, including about $7 million for its Global Research & Innovation headquarters; the liquidity discussion identifies $10–$15 million of remaining 2016 planned and committed spending.
- Management described continued cost reductions, Drilling Technologies restructuring, and a shift in Production Technologies toward newer hydraulic pumping unit and electric submersible pump offerings. No formal revenue or earnings guidance was provided.
- The impairment assessment depended on estimated asset utilization, cash flows, market recovery, discount rates, and other assumptions. Management warned that a deeper or longer downturn could result in further impairment; no goodwill impairment was recorded in the quarter.
- Customer and industry concentration remain risks: two customers represented 21.1% and 10.9% of revenue, predominantly in Energy Chemistry Technologies. Citrus greening-related supply constraints could keep terpene prices elevated and volatile.
- Flotek disclosed consolidated securities class-action litigation, derivative suits, and an SEC inquiry concerning similar issues. The company said it intended to defend the claims, but could not reasonably estimate the outcome.
Important facts for investors to verify
- Whether CnF volume growth and improved chemistry margins can persist as oilfield activity remains weak.
- Actual cash generation, inventory conversion, receivables and tax-receivable recovery, and revolver availability against amended lender requirements.
- Compliance with the amendment’s minimum adjusted EBITDA and liquidity tests, and the consequences when suspended financial covenants return.
- Whether further asset or goodwill impairments are warranted if management’s recovery and utilization assumptions prove optimistic.
- Developments in the shareholder litigation and SEC inquiry, and any resulting financial or disclosure impact.