Business context and reporting period
Flotek Industries, Inc. is a diversified supplier of oilfield chemistries, drilling and production technologies, and consumer and industrial chemicals. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods.
Financial results and position
- Third quarter: Revenue was $87.9 million, down 24.7%. Gross profit was $31.2 million and gross margin was 35.5%, versus $46.1 million and 39.5% a year earlier. Operating income was $2.8 million, compared with $20.8 million; net income was $2.0 million, or $0.04 per diluted share, versus $14.3 million, or $0.26.
- Nine months: Revenue was $257.3 million, down 20.7%. Gross profit was $87.0 million and gross margin was 33.8%, versus $132.1 million and 40.7%. The company reported an operating loss of $17.1 million and net loss of $12.1 million, or $0.22 per share, compared with operating income of $57.3 million and net income of $37.3 million, or $0.69 per share.
- Cash flow: Nine-month operating cash flow was $17.8 million, down from $39.9 million. Investing used $9.5 million and financing used $6.0 million. Cash ended the period at $3.0 million.
- Debt and liquidity: Total debt was $47.8 million ($27.7 million classified as current and $20.0 million long-term). Revolver availability was $47.0 million, for reported total liquidity of $50.0 million. The company said it was in compliance with its debt covenants.
- Balance sheet: Total assets were $400.9 million, compared with $423.3 million at December 31, 2014. Equity was $295.5 million, down from $306.4 million.
Material changes versus the prior comparable period
- Sharp oilfield activity declines pressured results: average North American rig count fell 53.9% in the quarter and 43.2% year to date from 2014.
- Drilling Technologies revenue fell 63.9% in the quarter and 49.0% year to date. The segment recorded a nine-month operating loss of $24.6 million, including impairment charges.
- Energy Chemistry Technologies revenue declined 11.7% in the quarter and 15.5% year to date, but CnF sales volumes rose 59% year over year in the quarter. Consumer and Industrial Chemistry revenue increased 8.8% year to date; Production Technologies revenue declined 6.8%.
- Gross-margin pressure reflected pricing and product mix. SG&A rose 9.9% in both the quarter and nine-month comparison, partly due to higher stock compensation, professional fees, sales staffing and an environmental-related civil penalty.
Outlook, commentary, risks and unusual items
- Management cited continued oil-price weakness and reduced customer drilling activity as challenging conditions, while expecting CnF sales to outpace general oilfield activity. It anticipated intense competition and said product innovation, service improvements and FracMax analytics could support market-share gains into 2016. No specific revenue or earnings guidance was provided.
- Management expected 2015 capital spending of $20 million to $23 million, including about $7 million for laboratory facilities; $11.1 million had been spent through September. Planned spending for the rest of 2015 was $9 million to $12 million.
- A $20.4 million pretax impairment was recorded in the second quarter—$19.6 million in Drilling Technologies and $0.8 million in Production Technologies—following lower activity expectations, reduced utilization and business focus changes.
- Key risks include oil and gas activity and pricing, customer and industry concentration, competition and margin pressure, citrus-oil price and supply volatility, and changes in regulation. Three customers each accounted for more than 10% of third-quarter revenue; more than 97% of revenue from these customers was in Energy Chemistry Technologies. Management reported no pending or threatened litigation expected to materially affect the company.
Important facts for investors to verify
- Whether CnF growth and improved Energy Chemistry margins can persist despite weak oilfield activity and incentive pricing.
- Whether Drilling Technologies can recover profitability after asset impairments and the segment refocus.
- Liquidity and covenant headroom under the secured credit facility, including the current classification of revolver borrowings.
- Execution and funding of planned capital spending, including the Houston research facility, while operating cash flow has declined.
- The effects of customer concentration, the environmental-related civil penalty, and the authorized share-repurchase programs on future cash and capital allocation.