Flotek Industries, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Flotek is now focused on its Energy Chemistry Technologies oilfield business. The Consumer and Industrial Chemistry Technologies (CICT) business was sold to ADM on February 28, 2019 and is reported as discontinued operations.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue from continuing operations | $34.7 million | $39.5 million | $77.9 million | $80.6 million |
| Operating loss | $13.9 million | $47.1 million | $28.1 million | $56.4 million |
| Loss from continuing operations | $13.0 million | $69.0 million | $28.4 million | $78.5 million |
| Net income (loss) | $(14.6) million | $(75.4) million | $18.4 million | $(75.3) million |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $(24.5) million | $(19.7) million |
- Q2 revenue fell 12.3%; first-half revenue fell 3.3%. Management attributed the declines to volatile oilfield activity, sales-team turnover, customer completion delays, and performance-based pricing for certain clients.
- Operating expenses excluding depreciation and amortization were 110.4% of Q2 revenue and 106.4% of first-half revenue, versus 89.9% and 89.6% in the comparable 2018 periods. Higher materials, labor, equipment and logistics costs, lower plant utilization, and a one-time contract termination charge weighed on results.
- Q2 operating loss improved from 2018 largely because Q2 2018 included a $37.2 million goodwill impairment. First-half net income included $46.8 million of income from discontinued operations, including a $67.7 million gain on the CICT sale; it does not reflect a return to profitability in continuing operations.
Cash, debt, and liquidity
- At June 30, 2019, cash and cash equivalents were $97.5 million, with an additional $0.7 million of restricted cash. Total current assets were $179.2 million and current liabilities were $23.6 million.
- No debt was outstanding at quarter-end. Flotek repaid approximately $49.7 million under its revolving credit facility and terminated the facility on March 1, 2019, after the CICT sale.
- First-half investing cash flow was $168.9 million, primarily reflecting $169.7 million of business-sale proceeds. Operating cash use of $24.5 million and net financing cash use of $49.9 million included substantial working-capital outflows.
- Operating lease liabilities totaled $18.9 million; total stated finance and operating lease obligations were $36.5 million. First-half capital expenditures were $0.8 million.
Material changes, outlook, and risks
- The CICT sale was for $175.0 million in cash consideration. ADM held $4.4 million in escrow for working-capital adjustments and $13.1 million for potential indemnification claims. The parties had not agreed on the working-capital adjustment as of the filing; Flotek was engaging a third party to help resolve it.
- Management expected approximately $2.9 million of maintenance capital spending for the remainder of 2019 and had no specific growth-capital projects planned or committed. The filing provides no numerical revenue or earnings guidance.
- Management warned that revenue for the remainder of 2019 could be negatively affected while a rebuilt, more technically oriented sales team was integrated. It cited continued oilfield-market volatility, relatively soft crude prices, and customer purchasing changes as uncertainties.
- North American active rigs averaged 1,071 in Q2, down 6.6% year over year; U.S. rigs averaged 989, down 4.8%. Flotek depends heavily on oil and gas customers, with two customers each contributing more than 10% of Q2 revenue.
- A terpene supply agreement runs through September 2023, with an extension option and minimum annual purchase requirements at variable prices. A potential $2.4 million employment-tax exposure related to CEO compensation was accrued, with a corresponding indemnification receivable from CEO-affiliated companies and a personal guaranty from the CEO.
- The Fifth Circuit affirmed dismissal of the securities class action in February 2019. Management said routine litigation was not expected to materially affect the company. Disclosure controls were assessed as effective at June 30, 2019.
Investor facts to verify
- Resolution and final cash impact of the CICT post-closing working-capital adjustment, and release timing or claims against the escrowed funds.
- Whether continuing-business margins and operating cash flow improve, given operating costs above revenue and first-half cash use.
- Execution of the sales-team rebuild and any effect on second-half revenue and customer retention.
- Use of remaining CICT proceeds and the assumptions behind management’s liquidity assessment, including lease and terpene purchase commitments.
- Collection of the $2.4 million indemnification receivable and final IRS determination of the employment-tax matter.