Flotek Industries, Inc. — 2013 Form 10-K Summary
Business context and reporting period. This filing covers the fiscal year ended December 31, 2013; fourth-quarter figures are also reported. Flotek supplies oilfield chemicals, drilling tools and artificial-lift equipment, and, following its May 2013 acquisition of Florida Chemical, citrus-based ingredients and chemicals for consumer and industrial markets. The four reportable segments are Energy Chemical Technologies, Consumer and Industrial Chemical Technologies, Drilling Technologies, and Artificial Lift Technologies.
Key financial results
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Revenue | $371.1 million | $312.8 million | Up 18.6%; Florida Chemical contributed $50.9 million. Excluding the acquisition, revenue rose 2.3%. |
| Gross profit / margin | $147.5 million / 39.8% | $131.6 million / 42.1% | Profit up 12.1%; margin fell 2.3 percentage points, mainly from acquired-business and product mix. |
| Operating income / margin | $58.7 million / 15.8% | $58.6 million / 18.7% | Income nearly flat; margin declined. |
| Net income | $36.2 million | $49.8 million | Down 27.3%; 2012 benefited from a $16.5 million deferred-tax valuation allowance release. |
| Diluted earnings per share | $0.67 | $0.97 | Down from the prior year. |
| Operating cash flow | $39.5 million | $49.5 million | Lower by $10.0 million; working capital used $19.3 million. |
| Capital expenditures | $15.0 million | $20.7 million | 2014 planned spending is approximately $18 million. |
Fourth quarter and segment trends
- Fourth-quarter 2013 revenue was $100.8 million, gross profit $39.8 million, net income $11.0 million, and diluted EPS $0.20. Fourth-quarter 2012 net income was $23.2 million, including the effect of the favorable tax item.
- Energy Chemical Technologies revenue rose 9.2% to $200.9 million; operating income was nearly unchanged at $65.4 million.
- Consumer and Industrial Chemical Technologies contributed $42.9 million revenue and $6.3 million operating income from its May acquisition onward.
- Drilling Technologies revenue declined 3.7% to $112.4 million and operating income fell 17.8% to $18.3 million, reflecting weaker actuated-tool rentals, pricing pressure, and higher costs.
- Artificial Lift revenue rose 22.3% to $14.8 million, but operating income declined 9.9% to $3.1 million as sales mix shifted toward lower-margin equipment.
Financial position and liquidity
- At December 31, cash was $2.7 million, current assets $137.7 million, and current liabilities $62.6 million. Receivables were $65.0 million and net inventory $63.1 million.
- Total debt was $62.1 million: $45.8 million under the term loan and $16.3 million under a revolving facility with a $75 million commitment. The debt bears variable interest rates; the company reported covenant compliance at year-end.
- The credit agreement requires a $3.0 million term-loan prepayment by March 3, 2014. Management expected operating cash flow and, if needed, revolver capacity to fund planned investment and debt payments.
- Stockholders’ equity was $249.8 million, compared with $154.7 million a year earlier; total assets increased to $375.6 million, partly reflecting the Florida Chemical acquisition.
Material changes, outlook, and risks
- Acquisition and financing: Florida Chemical was acquired for stated consideration of $106.4 million, comprising cash, shares, and repayment of debt. It added $50.9 million of revenue from the acquisition date and expanded the company into flavor, fragrance, food, cleaning, and other specialty-chemical markets. The company also acquired EOGA effective January 1, 2014, for $5.25 million cash and 94,354 shares.
- 2014 outlook: Management anticipated market conditions broadly consistent with recent conditions, planned approximately $18 million of capital expenditures, and expected operating cash flow to fund investment and required debt payments. It cited expansion of Energy Chemical production capacity and Drilling product offerings, and expected continued intense competition. No numerical revenue or earnings guidance was provided.
- Growth initiatives: The company planned a manufacturing facility in Oman through a proposed joint venture, subject to government approval, and cited a 2013 agreement to provide chemistry technologies in Abu Dhabi.
- Operating and market risks: Demand is sensitive to oil and gas prices, drilling activity, customer spending, competition, and regulation. Three customers represented 30% of 2013 revenue collectively; the largest accounted for 16.2%. Citrus feedstock availability and prices are exposed to crop, weather, and disease conditions; a late-2013 California freeze and Florida harvest disruptions drove feedstock price increases.
- Integration and controls: Florida Chemical integration and migration to Flotek’s ERP system could create operational or reporting risks. Management and the auditor reported effective internal control overall, but Florida Chemical was excluded from the year-end control assessment under the acquired-business accommodation; it represented approximately 37% of assets and 14% of revenue.
- Other notable items: The company recorded a $20.8 million income-tax provision in 2013 versus a $4.3 million tax benefit in 2012. No material pending litigation was identified, and no goodwill or long-lived asset impairment was recorded in 2013. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of future growth and margin performance comes from the acquired Florida Chemical business versus legacy operations, and whether integration benefits materialize.
- Whether operating cash flow can support the planned $18 million of 2014 capital expenditures, required debt payments, and acquisition spending given low year-end cash and working-capital needs.
- Debt covenant headroom, variable-rate exposure, the required $3.0 million prepayment, and actual availability under the borrowing base.
- Whether the decline in gross and operating margins persists, particularly in Drilling Technologies and lower-margin Artificial Lift sales.
- Customer concentration, citrus feedstock supply and pricing, and the impact of competition, commodity prices, and regulation on demand.
- Progress integrating Florida Chemical into the ERP and control environment; also note that the remaining 1,277,250 warrants were exercised on February 7, 2014, generating $1.5 million and eliminating those outstanding warrants.