Flotek Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Flotek develops oilfield chemicals, drilling and production technologies, and consumer and industrial chemicals. Results include Florida Chemical, acquired in May 2013, and EOGA, acquired effective January 1, 2014.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $102.6 million | $78.2 million |
| Gross profit / margin | $43.7 million / 42.6% | $32.6 million / 41.7% |
| Operating income / margin | $18.8 million / 18.3% | $12.5 million / 16.0% |
| Net income / net margin | $12.0 million / 11.7% | $7.8 million / 9.9% |
| Basic / diluted EPS | $0.22 / $0.22 | $0.16 / $0.15 |
| Cash from operations | $15.5 million | $8.0 million |
| Cash used in investing / financing | $8.7 million / $7.7 million | $3.0 million / $7.4 million |
Revenue increased 31.1%; management attributed $16.8 million of the increase to acquisitions. Excluding acquisition effects, revenue grew 9.6%. Gross margin improvement reflected a higher share of proprietary Energy Chemical products and Florida Chemical supply-chain benefits. SG&A rose 19.7% to $21.6 million, but declined as a share of revenue to 21.0% from 23.0%. Depreciation and amortization increased 92.0%, primarily due to acquired Florida Chemical assets.
At March 31, cash was $1.7 million, current assets were $145.7 million, and current liabilities were $66.5 million. Total debt was $55.0 million: a $41.0 million term loan and $13.9 million drawn on the revolver. Revolver availability net of borrowings was $60.9 million. The company reported compliance with all debt covenants. Debt is secured by substantially all domestic real and personal property; covenants include leverage tests and a capital expenditure limit. Cash declined $1.1 million during the quarter.
Material changes and segment results
- Energy Chemical Technologies: Revenue rose 39.7% to $62.4 million; operating income increased 51.0% to $21.6 million. Growth reflected stimulation chemical sales, including proprietary products.
- Consumer and Industrial Chemical Technologies: Contributed $13.0 million in revenue and $2.3 million in operating income. The segment was created following the 2013 Florida Chemical acquisition.
- Drilling Technologies: Revenue fell 13.9% to $24.9 million and operating income declined 38.8% to $3.3 million. The filing cites weaker product and rental sales, competition, pricing pressure, and seasonal and logistics issues.
- Production Technologies: Revenue declined 51.5% to $2.3 million; the segment reported a $0.1 million operating loss versus $1.6 million income a year earlier. Flotek is shifting the business from coal-bed methane toward unconventional oil markets.
Operating cash flow increased, but working capital absorbed approximately $1.0 million, including a $9.9 million inventory increase. Investing cash use included $5.3 million, net of cash acquired, for EOGA and capital expenditures. Flotek paid $4.0 million for treasury shares related to employee award tax withholding. On February 7, warrants were exercised for 1.28 million shares, generating $1.5 million; no warrants from the 2009 preferred stock offering remained outstanding afterward.
Outlook, risks, and unusual items
Management expected economic conditions to remain consistent with recent markets and anticipated intense competition for contracts and margins, while expecting product innovation and service improvements to support market-share gains in 2014. It planned to expand Energy Chemical and Drilling Technologies capacity and offerings, and increase spending as Production Technologies refocused on unconventional oil. Management cited expected demand for certain stimulation chemistries and drilling tools, but provided no specific financial guidance.
Risks include changes in oil and gas activity and prices, customer demand and pricing pressure, citrus-oil supply and price volatility, weather and crop conditions, and potential regulation of hazardous chemicals. Citrus raw-material volatility may cause quarterly revenue and margin fluctuations. One customer generated 15.4% of quarterly revenue, over 98% of it in Energy Chemical Technologies. The company also noted customer and receivables concentration in the oil and gas industry. Management said liquidity was adequate to withstand adverse market changes. Flotek planned to file a universal shelf registration to provide potential access to capital markets; it said it had no immediate intention to access them.
EOGA was acquired for $6.4 million in cash and 94,354 shares; the company recorded $5.3 million of goodwill. Subsequent to quarter-end, Flotek acquired SiteLark effective April 1 for $0.4 million and 5,327 shares. No material impairment or litigation was reported. Management stated disclosure controls were effective and that there were no material changes to reported risk factors.
Important facts for investors to verify
- How much revenue and margin growth is organic and repeatable versus attributable to acquisitions, particularly Florida Chemical and EOGA.
- Whether inventory growth, receivables collection, and the low cash balance remain manageable as operations expand.
- Progress in reversing revenue and profitability declines in Drilling and Production Technologies amid competition and the Production Technologies repositioning.
- Debt-covenant headroom, revolving-credit availability, and the implications of secured debt and the planned shelf registration.
- Exposure to the major customer and to citrus-oil availability and pricing; the filing does not provide a specific full-year revenue or earnings forecast.