Flotek Industries, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Flotek supplies specialty oilfield chemistry and logistics, and citrus-based compounds for consumer and industrial markets. Continuing operations comprise Energy Chemistry Technologies (ECT) and Consumer and Industrial Chemistry Technologies (CICT); the previously held-for-sale Drilling Technologies and Production Technologies businesses were sold or disposed of in 2017.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $60.5 million | $80.0 million |
| Operating loss / margin | $6.8 million / (11.2%) | $0.6 million / (0.8%) |
| Net income (loss) | $0.1 million | $(12.0) million |
| Operating cash flow | $(11.8) million | $(2.6) million |
| Capital expenditures | $1.8 million | $1.9 million |
- Revenue fell 24.3% year over year. Cost of revenue excluding depreciation and amortization declined less, by 11.5%, so its share of revenue rose to 75.5% from 64.6%.
- Net income included a $7.7 million income-tax benefit despite a $7.6 million pretax loss; continuing-operations EPS was shown as zero after rounding. The 2017 net loss included $11.2 million of discontinued-operations losses, limiting direct comparison.
- ECT revenue declined 32.4% to $41.1 million and the segment recorded a $0.2 million operating loss, versus $8.5 million operating income a year earlier. CICT revenue edged up 1.3% to $19.4 million, while operating income fell 34.2% to $2.4 million.
- Cash and equivalents were $2.9 million at quarter-end, down from $4.6 million at year-end 2017. Current assets were $141.1 million and total liabilities $71.6 million. Inventory increased $6.3 million from year-end, while the inventory reserve rose to $1.5 million from $0.6 million.
- Revolving-credit borrowings were $39.7 million, up from $28.0 million at year-end; the filing classifies all as current due to the lockbox arrangement and subjective acceleration clause. Net debt was $36.9 million. Available revolver capacity was $35.2 million, giving stated total liquidity of $38.1 million including cash.
Changes, outlook and risks
- ECT’s decline reflected product mix, reduced Canadian and Rockies activity, severe winter weather and operational challenges, customer-base transitions, and customers increasingly buying chemistry directly from manufacturers. Management also cited higher raw-material and labor costs and lower manufacturing throughput. Cost reductions reduced corporate and segment selling and administrative expenses.
- Despite year-over-year revenue pressure, average North American active rigs increased 19.1%, including a 30.2% increase in U.S. rigs. Management expected U.S. oilfield activity to remain stable if crude prices stayed relatively stable and regulatory impediments remained limited. It expected to pursue market penetration for its CnF chemistries and PCM platform; no revenue or earnings guidance was provided.
- Management forecast 2018 capital spending of $9–$13 million and believed liquidity was adequate. The credit facility provides $75 million of revolving capacity, runs through May 2022, and requires compliance with financial covenants; the company reported compliance at quarter-end. Capital spending is capped at $26 million for 2018 under the facility, subject to availability-related restrictions.
- Risks include oilfield activity and commodity-price volatility, customer purchasing shifts and industry concentration, raw-material costs, and citrus-oil supply volatility related to crop disease and weather. Management cited higher citrus-oil prices and volatility but expected supply to meet its needs and planned to manage terpene costs through formulations and pricing.
- Operating cash use worsened, chiefly because working capital consumed $10.5 million, including a $7.5 million inventory build and lower accrued liabilities. Management’s liquidity assessment should be considered alongside the low cash balance and rising revolver use.
- Related securities class-action dismissal remained under appeal; derivative litigation was ongoing, and the company said it could not reasonably estimate its outcome. The SEC inquiry had concluded without a recommendation for enforcement action. Management said other routine litigation was not expected to have a material effect.
Investor verification priorities
- Verify the sustainability and cash-tax implications of the $7.7 million tax benefit, including the provisional accounting for the 2017 Tax Act.
- Track whether ECT revenue, gross margins, customer transitions and inventory levels recover, and whether the reported rig-count improvement translates into Flotek sales.
- Monitor operating cash flow, revolver borrowings, borrowing-base availability and covenant headroom; reported liquidity depends substantially on continued access to the credit facility.
- Review citrus-oil and terpene supply, pricing and inventory-reserve developments, as well as the status of the appealed class action and derivative litigation.