Flotek Industries, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with Q1 2016. Flotek supplies oilfield chemistry and services, and consumer and industrial chemistry products. Results classify Drilling Technologies and Production Technologies as discontinued operations, following the 2016 decision to sell those businesses.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Continuing-operations revenue | $80.0 million | $63.8 million |
| Gross profit / margin | $27.7 million / 34.7% | $23.8 million / 37.3% |
| Operating income (loss), continuing operations | ($0.6) million | $0.4 million |
| Loss from continuing operations | ($0.7) million | ($0.03) million |
| Loss from discontinued operations, net of tax | ($11.2) million | ($30.2) million |
| Net loss / diluted loss per share | ($12.0) million / ($0.20) | ($30.2) million / ($0.55) |
| Cash used in operating activities | $2.6 million | $6.4 million |
| Cash and total debt at quarter end | $1.8 million / $49.7 million | Cash $2.5 million |
Revenue increased 25.3%, driven principally by Energy Chemistry Technologies, whose sales rose 36.0% to $60.8 million. Consumer and Industrial Chemistry Technologies revenue was essentially flat at $19.2 million. Consolidated gross margin declined as Energy Chemistry product mix and higher raw-material costs weighed on margins. Higher SG&A, depreciation and amortization, and research and innovation costs contributed to the shift from continuing-operations operating income to a loss.
Cash declined $3.0 million during the quarter. Working capital absorbed cash, notably as receivables and inventory increased. Capital expenditures were $1.9 million, versus $3.8 million a year earlier. Total debt was $49.7 million, comprising $40.6 million drawn on the revolver and a $9.1 million term loan. The company reported $15.2 million of revolver availability and $17.0 million of total liquidity including cash; it was in compliance with debt covenants at March 31.
Material changes, outlook and risks
- Discontinued operations recorded $16.3 million of pretax write-downs of assets held for sale ($6.6 million for Drilling Technologies and $9.7 million for Production Technologies). The quarter’s total net loss was therefore substantially larger than the continuing-operations loss.
- On May 2, 2017, Flotek agreed to sell substantially all Drilling Technologies assets to National Oilwell Varco for $17.0 million in cash, subject to working-capital adjustments; $1.5 million is held back for up to 18 months. Closing was expected in mid-May. Management expected sales of both discontinued segments to be completed during 2017.
- Management expected North American oilfield activity to improve modestly through 2017, assuming relatively stable crude prices and reduced regulatory impediments. It cited CnF chemistry sales-volume growth of 23.2% year over year. These are expectations, not guaranteed results.
- 2017 capital spending guidance was $10–$14 million. Management said citrus-oil supply had tightened due to citrus greening, driving higher and more volatile prices; it expected terpene prices to remain elevated and planned to respond with product formulations and pricing.
- Key exposures include oil-and-gas activity and customer concentration, commodity and raw-material prices, interest rates, foreign exchange, and working-capital needs. A securities class action had been dismissed, but the lead plaintiff appealed; derivative litigation remained pending, and the SEC had opened a related inquiry. Management could not reasonably estimate the derivative-litigation outcome.
- Management said disclosure controls were effective as of March 31, 2017, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track completion and final proceeds from the NOV sale, including working-capital adjustments and the $1.5 million holdback, and the disposition of Production Technologies.
- Assess whether continuing-operations revenue growth converts to stronger margins and operating profitability, especially given lower Energy Chemistry margins.
- Monitor cash conversion, receivables and inventory growth, revolver availability, covenant headroom, and the large amount of debt classified as current.
- Review the assumptions behind asset-sale valuations and write-downs, and the eventual cash and earnings effects of discontinued operations.
- Follow the securities-litigation appeal, derivative cases, and SEC inquiry, as well as citrus-oil cost and supply trends.