Flotek Industries, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Flotek is an energy-chemistry and oilfield services company; following the February 2019 sale of its Consumer and Industrial Chemistry Technologies (CICT) business, its continuing operations are focused on Energy Chemistry Technologies (ECT). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $21.9 | $53.7 | $99.8 | $134.3 |
| Operating loss | $(11.9) | $(4.1) | $(40.0) | $(60.4) |
| Operating margin | (54.2)% | (7.6)% | (40.0)% | (45.0)% |
| Loss from continuing operations | $(11.2) | $(4.8) | $(39.6) | $(83.4) |
| Net income (loss) | $(11.1) | $(3.9) | $7.3 | $(79.3) |
| Basic and diluted EPS | $(0.19) | $(0.06) | $0.13 | $(1.37) |
Q3 revenue fell 59.3% year over year; nine-month revenue declined 25.7%. Management attributed the declines to volatile U.S. onshore activity, customer deferrals of completions, and sales-team turnover. Operating expenses excluding depreciation and amortization fell in dollars but rose to 108.3% of revenue in Q3 and 106.8% year to date, reflecting the weaker revenue base. The nine-month 2018 comparison included a $37.2 million goodwill impairment; no goodwill impairment was recorded in 2019.
Nine-month net income included $46.9 million of income from discontinued operations, principally the CICT sale gain. Continuing operations remained loss-making. Q3 discontinued-operations income was $0.1 million.
Cash, debt, liquidity, and cash flow
- At September 30, cash and cash equivalents were $107.0 million, restricted cash was $0.7 million, and total assets were $249.4 million. Current assets were $166.5 million against current liabilities of $19.4 million.
- No borrowings remained at quarter-end. Flotek repaid and terminated its $75 million PNC credit facility on March 1, 2019; the December 2018 balance was $49.7 million.
- Nine-month operating cash use was $13.7 million, versus $24.8 million in 2018. Investing activities provided $167.5 million, mainly from $169.7 million of CICT sale proceeds; financing activities used $49.9 million, primarily for net debt repayment.
- Capital expenditures were $1.9 million for the first nine months. Management expected approximately $2.2 million for full-year 2019, including about $0.3 million of maintenance spending for the remainder of the year, and reported no committed growth-capital projects.
- Operating lease liabilities totaled $18.7 million. The company also reported a $72.0 million remaining minimum commitment under its terpene supply agreement, running through September 2023 with an extension option.
Material changes, outlook, and risks
- Flotek sold CICT to ADM for $175.0 million in cash consideration, subject to escrow arrangements. At quarter-end, $12.5 million of escrow, including interest, was included in other current assets. The parties were pursuing third-party arbitration over the final working-capital adjustment.
- North American average active rigs declined 16.5% in Q3 year over year; U.S. rigs declined 12.5%. Management expected global oilfield activity to remain volatile through the rest of 2019, assuming relatively soft crude prices and limited regulatory impediments.
- Management said it had substantially rebuilt a more technically oriented sales organization by quarter-end after losing key sales personnel earlier in 2019. It cautioned that the transition and longer sales cycles could continue to weigh on revenue for the remainder of the year, while expressing confidence in longer-term opportunities for its chemistry products and services.
- Key exposures include oil-and-gas activity and commodity conditions, customer concentration, customer credit risk, and market demand for Flotek’s products. One customer accounted for 35.9% of Q3 revenue. Most cash was held at two financial institutions, with balances often exceeding insured limits.
- An IRS employment-tax matter related to the CEO’s compensation resulted in a $1.8 million liability and a $2.4 million receivable from affiliated companies at quarter-end; the affiliates had agreed to indemnify Flotek, and the CEO provided a personal guaranty. An October 2019 employment-agreement amendment gave Flotek offset and withholding rights.
- The Fifth Circuit affirmed dismissal of the securities class action on February 7, 2019. Management reported no other pending or threatened litigation expected to materially affect financial condition, results, or liquidity. Management also stated disclosure controls were effective at September 30, 2019, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ECT revenue and margins stabilize amid declining rig activity, customer completion deferrals, and sales-force changes.
- Final resolution of the ADM working-capital adjustment and timing and amount of escrow releases.
- Collection and enforceability of the $2.4 million CEO-affiliate receivable and the related IRS employment-tax obligations.
- Cash use from continuing operations, deployment of sale proceeds, and the ability to meet lease and terpene supply commitments.
- The impact of customer concentration and oilfield-market volatility on liquidity and future operating results.