Flotek Industries, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Flotek supplies energy-related chemicals, drilling and production technologies, and consumer and industrial chemicals.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $105.3 million | $93.6 million | $207.9 million | $171.8 million |
| Gross margin | $42.3 million; 40.2% | $37.6 million; 40.2% | $86.0 million; 41.4% | $70.2 million; 40.9% |
| Operating income | $17.7 million; 16.8% | $13.5 million; 14.5% | $36.5 million; 17.5% | $26.1 million; 15.2% |
| Net income | $11.0 million | $8.4 million | $23.1 million | $16.2 million |
| Diluted EPS | $0.20 | $0.16 | $0.42 | $0.31 |
| Operating cash flow | Not presented quarterly | $18.4 million | $11.5 million |
Q2 revenue rose 12.5% year over year and net income rose about 31%; first-half revenue increased 21% and net income about 42%. First-half operating cash flow improved, but included a $13.1 million working-capital use, notably an $18.8 million inventory increase.
At June 30, cash was $2.2 million, current assets $162.9 million and current liabilities $69.0 million. Total debt was $56.9 million, including $17.8 million under the revolver and $39.1 million under the term loan. Revolver availability, net of borrowings, was $57.0 million. Working capital was approximately $93.9 million. Capital expenditures were $9.2 million for the first half.
Business and material changes
- Energy Chemical Technologies led growth: Q2 revenue increased 31% to $62.6 million, primarily on stimulation chemical additives; first-half revenue grew 35%.
- Drilling Technologies revenue declined 8.5% in Q2 and 11.2% in the first half, amid reduced tool utilization, pricing pressure, and lower sales. Segment operating income fell 27% and 33%, respectively.
- Consumer and Industrial Chemical Technologies Q2 revenue was roughly flat, but lower terpene margins reduced gross margin percentage to 22.9% from 29.1%. The prior-year comparison includes only May and June after the Florida Chemical acquisition.
- Production Technologies revenue declined 15.7% in Q2 and 36.4% in the first half. First-half segment operating income fell 82%, as the business was being refocused toward unconventional oil markets.
- First-half growth also reflected acquisitions: Florida Chemical, acquired in May 2013, and 2014 acquisitions EOGA and SiteLark. EOGA and SiteLark generated $5.7 million of net cash acquisition outlays; the company recorded $5.9 million of goodwill for these acquisitions.
Outlook, risks and other notable items
- No specific full-year revenue, earnings, or margin guidance was provided. Management expected economic conditions to remain consistent with recent markets and anticipated competition for contracts and margins to remain intense.
- Management planned to expand Energy Chemical and Drilling capacity, develop products and markets, and increase capital and operating spending to reposition Production Technologies. It cited anticipated demand for its chemical and tool products and expected 2014 citrus-oil supply to meet needs, while warning that citrus-market volatility could cause quarterly revenue and margin fluctuations.
- Risks include oil and gas activity and prices, customer demand, drilling efficiency and pricing pressure, raw-material and citrus-crop volatility, regulation of hazardous chemicals, foreign exchange movements, and customer/industry concentration. One customer represented 19.2% of first-half revenue, with over 94% of that revenue in Energy Chemical Technologies.
- The credit facility is secured by substantially all domestic assets, imposes financial and capital-expenditure covenants, and restricts cash dividends. Flotek reported compliance with all debt covenants at quarter-end. Management said it believed liquidity was adequate under adverse market conditions.
- Management intended to file a universal shelf registration in the coming weeks, allowing possible future issuance of debt or equity securities; it stated there was no immediate intention to access capital markets.
- Routine litigation was disclosed, with no pending or threatened matter management expected to materially affect financial position, results, or liquidity. No impairment of goodwill or other specified assets was recorded. Disclosure controls were reported effective.
Investor verification priorities
- Assess whether Energy Chemical growth and margins can offset sustained weakness in Drilling and Production Technologies.
- Track inventory and working-capital absorption, operating cash conversion, and the low cash balance relative to debt obligations.
- Review debt maturities, covenant headroom, revolver availability, and the implications of secured borrowing and the proposed shelf registration.
- Evaluate acquisition performance and integration, and whether CICT’s terpene margins recover amid citrus-input price volatility.
- Monitor exposure to the largest customer and oilfield activity, competitive pricing, and regulatory or environmental changes.