Flotek Industries, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing; fourth-quarter figures are included where relevant. Flotek supplies oilfield chemistry, drilling and production products and services, and citrus-based consumer and industrial chemicals.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $334.4 million | $449.2 million |
| Gross profit / margin | $115.1 million / 34.4% | $183.0 million / 40.7% |
| Operating income (loss) | $(19.2) million | $80.9 million |
| Net income (loss) | $(13.5) million | $53.6 million |
| Diluted EPS | $(0.25) | $0.97 |
| Cash from operating activities | $26.7 million | $48.7 million |
- Revenue fell 25.6% year over year; gross margin contracted 6.3 percentage points. North American average active rig count fell 47.8%.
- Cash and equivalents were $2.2 million. Total debt was $50.5 million ($25.1 million revolving borrowings and $25.4 million term loan); net debt was $48.3 million. Revolver availability was $37.8 million, and the company reported compliance with debt covenants.
- Current assets were $151.7 million and current liabilities $67.0 million. Capital expenditures were $20.5 million in 2015.
- Fourth-quarter 2015 revenue was $77.0 million and net loss was $1.4 million, versus revenue of $124.5 million and net income of $16.3 million in fourth-quarter 2014.
Material changes and unusual items
- Drilling Technologies revenue fell 54.0% to $52.1 million; segment operating loss was $27.3 million, including a $19.6 million impairment charge. Production Technologies revenue declined 23.3% to $12.3 million, with an operating loss of $4.1 million.
- Energy Chemistry Technologies revenue declined 20.5% to $213.6 million, but CnF chemistry sales volumes increased 18%. Consumer and Industrial Chemistry Technologies revenue rose 10.3% to $56.4 million.
- The company recorded $20.4 million of inventory and rental-equipment impairments after refocusing its drilling and production businesses. No goodwill impairment was recorded, although the Teledrift reporting unit’s year-end valuation had limited headroom.
- Operating cash flow decreased to $26.7 million. Working capital used $1.4 million; inventory increased $17.6 million and accounts payable decreased $13.5 million.
- Two customers represented approximately 13.9% and 12.0% of revenue; the three largest customers together represented 35%.
Outlook, risks and contingencies
- Management expected crude prices and North American oilfield activity to remain depressed through the first half of 2016 and potentially beyond. It warned further activity declines could reduce revenue and operating income. The filing provides no specific revenue or earnings guidance.
- Management planned 2016 capital spending of $20–$25 million, including approximately $7 million to complete a Houston research and innovation facility, and expected research and innovation investment to increase.
- Key exposures include oilfield spending and commodity-price volatility, intense competition and pricing pressure, customer concentration and collection risk, variable-rate debt, and citrus greening disease’s impact on citrus-oil supply and cost.
- Four putative securities class actions were filed in November 2015; three derivative lawsuits followed in January 2016. The company said it would defend the claims but could not estimate their outcome. The SEC had opened an inquiry into related issues.
- SG&A included a civil penalty related to an environmental matter; the filing text does not provide a clear value for that penalty. The company reported no environmental litigation then being litigated.
- Management and the auditor reported effective internal controls over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether oilfield demand, pricing and segment margins recover, particularly in Drilling Technologies, and whether CnF volume growth translates into revenue and profitability.
- Whether the $20–$25 million 2016 capital plan and debt repayments can be funded from operations and available credit amid low cash balances.
- Any developments in the securities litigation and SEC inquiry, including potential financial or disclosure consequences.
- Whether the Teledrift goodwill valuation assumptions remain supportable if oilfield conditions deteriorate further.
- Customer concentration, receivable collectability, and the availability and cost of citrus-based raw materials.