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| FTK > SEC Filings for FTK > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
Special Note About Forward-Looking Statements
Certain statements in Management's Discussion and Analysis ("MD&A"), other than
purely historical information, including estimates, projections, statements
relating the Company's business plans, objectives and expected operating
results, and the assumptions upon which those statements are based, are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements generally are identified by the words "believe," "project," "expect,"
"anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will,"
"would," "will be," "will continue," "will likely result," and similar
expressions. Forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties that may cause actual
results to differ materially from the forward-looking statements. A detailed
discussion of risks and uncertainties that could cause actual results and events
to differ materially from such forward-looking statements is included in the
section entitled "Risk Factors" in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2007. We undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events, or otherwise.
Overview
The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of Flotek Industries, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated condensed financial statements and the accompanying notes to the consolidated condensed financial statements (the "Notes").
We are a technology-driven growth company serving the oil, gas, and mining industries. We operate in select domestic and international markets including the Gulf Coast, the Southwest and the Rocky Mountains, Canada, Mexico, Central America, South America, Europe and Asia. We provide products and services to address the drilling and production-related needs of oil and gas companies. The customers for our products and services include the major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies and state-owned national oil companies. Our ability to compete in the oilfield services market is dependent on our ability to differentiate our products and services, provide superior quality and service, and maintain a competitive cost structure. Activity levels are driven primarily by current and expected commodity prices, drilling rig count, oil and gas production levels, and customer capital spending allocated for drilling and production.
We have made strategic acquisitions and other investments during the past several years in an effort to expand our product offering and geographic presence in key markets. Acquisitions completed in 2007 and 2008 include:
• Triumph Drilling Tools, Inc. ("Triumph"), a drilling tool sales and rental provider in Texas, New Mexico, Louisiana, Oklahoma and Arkansas, on January 4, 2007;
• 50% partnership interest in CAVO Drilling Motors, Ltd. Co., ("CAVO") which specializes in the rental, service and sale of high performance mud motors, on January 31, 2007, followed by the remaining 50% partnership interest in CAVO on November 15, 2007;
• Sooner Energy Services, Inc. ("Sooner"), which develops, produces and distributes specialty chemical products and services for drilling and production of natural gas, on August 31, 2007; and
• Teledrift Inc. ("Teledrift"), which designs and manufactures wireless survey and measurement while drilling, or MWD, tools, on February 14, 2008.
We continue to actively seek acquisition candidates in our core businesses.
Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(in thousands)
Revenue
Products $ 41,978 $ 32,148 $ 109,494 $ 86,539
Rentals 14,892 6,016 41,287 17,836
Services 5,917 3,564 15,286 10,234
62,787 41,728 166,067 114,609
Cost of revenue
Cost of products 23,601 19,174 64,116 51,406
Cost of rentals 7,282 2,716 18,048 7,775
Cost of services 3,377 1,845 8,521 5,562
34,260 23,735 90,685 64,743
Gross profit 28,527 17,993 75,382 49,866
Gross profit (% of revenue) 45.4 % 43.1 % 45.4 % 43.5 %
Expenses:
Selling, general and administrative 12,382 7,690 34,297 21,455
Depreciation and amortization 3,534 1,648 9,429 4,553
Research and development 494 132 1,331 440
Total expenses 16,410 9,470 45,057 26,448
Income from operations 12,117 8,523 30,325 23,418
Income from operations (% of revenue) 19.3 % 20.4 % 18.3 % 20.4 %
Other income (expense):
Interest expense (2,653 ) (834 ) (7,149 ) (2,544 )
Investment income and other (19 ) 325 (33 ) 709
Total other income (expense) (2,672 ) (509 ) (7,182 ) (1,835 )
Income before income taxes 9,445 8,014 23,143 21,583
Provision for income taxes (3,595 ) (2,965 ) (8,790 ) (7,975 )
Net income $ 5,850 $ 5,049 $ 14,353 $ 13,608
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Consolidated - Comparison of Three Months Ended September 30, 2008 and 2007
Revenue for the three months ended September 30, 2008 was $62.8 million, an increase of $21.1 million or 50.5%, compared to the same period in 2007. Revenue increased in all three of our segments due to increased drilling activity, price increases in the Chemical and Logistics and Artificial Lift segments and the increased acceptance of our downhole tool products and our proprietary suite of specialty chemicals. Acquisitions accounted for approximately $9.7 million of the increase.
Gross profit for the three months ended September 30, 2008 was $28.5 million, an increase of $10.5 million or 58.5%, compared to the same period in 2007. Gross profit as a percentage of revenue for the three months ended September 30, 2008 was 45.4%, compared to 43.1% for the same period in 2007. The increase in gross profit is due to the acquisitions in the Drilling Products segment.
Selling, general and administrative costs are not directly attributable to products sold or services rendered. Selling, general and administrative costs were $12.4 million for the three months ended September 30, 2008, an increase of 61.0% compared to $7.7 million during the same period in 2007. The increase was primarily due to increased indirect personnel costs in our Chemicals and Logistics, Drilling Products and Corporate segments, increased professional fees and costs associated with our increased international efforts.
Depreciation and amortization was $3.5 million for the three months ended September 30, 2008, an increase of 114.4% compared to $1.6 million during the same period in 2007. The increase is due to higher depreciation associated with acquired assets and increased capital expenditures. In addition, amortization expense increased due to the amortization of intangible assets acquired in 2007 and 2008.
Research and development ("R&D") costs increased to $0.5 million for the three months ended September 30, 2008 compared to $0.1 million for the same period in 2007. With the addition of our new Chemical and Logistics R&D facility near Houston in 2007, we continued to expand our R&D activity during the quarter. We also increased R&D activity in our Drilling Products segment. R&D expenditures are charged to expense as incurred.
Interest expense was $2.7 million for the three months ended September 30, 2008 versus $0.8 million in 2007. The increase was a result of higher debt levels incurred to finance the acquisitions made in the last half of 2007 and Teledrift in the first quarter of 2008. To finance the Teledrift acquisition, we issued $115.0 million senior convertible notes bearing an interest rate of 5.25% and due in 2028.
A provision for income taxes of $3.6 million was recorded for the three months ended September 30, 2008. An effective tax rate of 38.1% was applied for the three months ended September 30, 2008 versus 37.0% for the same period in 2007. The increase in our effective tax rate is primarily due to an increase in the percentage of earnings in state jurisdictions with higher state income tax rates.
Consolidated - Comparison of Nine Months Ended September 30, 2008 and 2007
Revenue for the nine months ended September 30, 2008 was $166.1 million, an increase of $51.5 million or 44.9%, compared to the same period in 2007. Revenue increased in all three of our segments due to increased drilling activity, price increases in the Chemical and Logistics segments and the increased acceptance of our products including our proprietary line of specialty chemicals. Acquisitions accounted for approximately $28.1 million of the increase.
Gross profit for the nine months ended September 30, 2008 was $75.4 million, an increase of $25.5 million or 51.2%, compared to the same period in 2007. Gross profit as a percentage of revenue for the nine months ended September 30, 2008 was 45.4%, compared to 43.5% for the same period in 2007. The increase in gross profit is due to the acquisitions in the Drilling Products segment.
Selling, general and administrative costs are not directly attributable to products sold or services rendered. Selling, general and administrative costs were $34.3 million for the nine months ended September 30, 2008, an increase of 59.9% compared to $21.5 million during the same period in 2007. The increase was primarily due to increased indirect personnel costs in our Chemicals and Logistics, Drilling Products and Corporate segments, increased professional fees and costs associated with our increased international efforts. In addition, $2.1 million of stock-based compensation expense was recorded during the nine months ended September 30, 2008 versus $0.9 million expense during the same period in 2007, associated with restricted stock and options granted to our employees, officers and directors in accordance with FAS 123R. The majority of the expense relates to stock compensation expense associated with restricted stock and option awards made to the CEO and former CFO as part of one year and five year retention programs.
Depreciation and amortization was $9.4 million for the nine months ended September 30, 2008, an increase of 107.1% compared to $4.6 million during the same period in 2007. The increase is due to higher depreciation and amortization associated with acquired assets and increased capital expenditures.
R&D costs increased to $1.3 million for the nine months ended September 30, 2008 compared to $0.4 million for the same period in 2007. With the addition of our new Chemical and Logistics R&D facility near Houston in 2007, we have expanded our R&D activity during the quarter. We also increased R&D activity in our Drilling Products segment. R&D expenditures are charged to expense as incurred.
Interest expense was $7.1 million for the nine months ended September 30, 2008 versus $2.5 million in 2007. The increase was a result of higher debt levels incurred to finance the acquisitions made in 2007 and Teledrift in the first quarter of 2008. To finance the Teledrift acquisition, we issued $115.0 million senior convertible notes bearing an interest rate of 5.25% and due in 2028.
A provision for income taxes of $8.8 million was recorded for the nine months ended September 30, 2008. An effective tax rate of 38.0% was applied for the nine months ended September 30, 2008 versus 37.0% for the same period in 2007. The increase in our effective tax rate is primarily due to an increase in the percentage of earnings in state jurisdictions with higher state income tax rates.
Results by Segment
Revenue and operating income amounts in this section are presented on a basis consistent with U.S. GAAP and include certain reconciling items attributable to each of the segments. Segment information appearing in Note 16 - Segment Information of the Notes is presented on a basis consistent with the Company's current internal management reporting, in accordance with FAS 131, Disclosures about Segments of an Enterprise and Related Information. Certain corporate-level activity has been excluded from segment operating results and is presented separately.
Chemicals and Logistics
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(in thousands)
Revenue $ 30,390 $ 23,310 $ 82,414 $ 61,363
Gross profit 13,832 11,021 38,736 29,477
Gross profit % 45.5 % 47.3 % 47.0 % 48.0 %
Income from operations $ 10,510 $ 8,883 $ 29,511 $ 23,737
Income from operations % 34.6 % 38.1 % 35.8 % 38.7 %
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Chemicals and Logistics - Comparison of Three Months Ended September 30, 2008 and 2007
Chemicals and Logistics revenue increased $7.1 million, or 30.4%, for the three months ended September 30, 2008 compared to the same period in 2007. The increase in revenue is a result of an increase in sales volume of our proprietary specialty chemicals, coupled with a price increase that went into effect in the first quarter of 2008. Sales of our proprietary, biodegradable, 'green' chemicals grew 37.0% to $21.9 million in the third quarter of 2008 from $16.0 million in the third quarter of 2007. The acquisition of Sooner in September 2007 accounted for approximately $1.1 million of the increase in revenue during the quarter.
Gross profit increased $2.8 million, or 25.5%, for the three months ended September 30, 2008 compared to the same period in 2007. Gross profit as a percentage of revenue decreased to 45.5% for the three months ended September 30, 2008 compared to 47.3% for the three months ended September 30, 2007. The decrease in gross profit is due to increased cost of petroleum-based raw materials which was partially offset by increased sales of our higher margin proprietary 'green' chemicals.
Income from operations increased $1.6 million, or 18.3%, for the three months ended September 30, 2008 compared to the same period in 2007. Income from operations as a percentage of revenue decreased to 34.6% for the three months ended September 30, 2008 compared to 38.1% for the three months ended September 30, 2007 due to higher raw material costs of surfactants and other petroleum based products, higher international sales costs and the expansion of R&D activity in the quarter.
Chemicals and Logistics - Comparison of Nine Months Ended September 30, 2008 and 2007
Chemicals and Logistics revenue increased $21.1 million, or 34.3%, for the nine months ended September 30, 2008 compared to the same period in 2007. The increase in revenue is a result of an increase in sales volume of our proprietary specialty chemicals. Sales of
our proprietary, biodegradable, 'green' chemicals grew 41.3% to $57.8 million for the nine months ended September 30, 2008 from $40.9 million in the same period in 2007. The acquisition of Sooner in September 2007 accounted for approximately $4.5 million of the increase in incremental revenue during 2008.
Gross profit increased $9.3 million, or 31.4%, for the nine months ended September 30, 2008 compared to the same period in 2007. Gross profit as a percentage of revenue decreased to 47.0% for the nine months ended September 30, 2008 compared to 48.0% for the nine months ended September 30, 2007. The decrease in gross profit is due to increased cost of petroleum-based raw materials and the addition of Sooner which currently generates lower gross profit margins than our existing chemical sales.
Income from operations increased $5.8 million, or 24.3%, for the nine months ended September 30, 2008 compared to the same period in 2007. Income from operations as a percentage of revenue decreased to 35.8% for the nine months ended September 30, 2008 compared to 38.7% for the nine months ended September 30, 2007 due to higher raw material costs of surfactants and other petroleum based products, higher international sales costs and the expansion of R&D activity in the quarter.
Drilling Products
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(in thousands)
Revenue $ 26,628 $ 14,145 $ 70,253 $ 42,452
Gross profit 13,009 5,836 33,058 17,686
Gross profit % 48.9 % 41.3 % 47.1 % 41.7 %
Income from operations $ 5,476 $ 1,757 $ 12,931 $ 5,179
Income from operations % 20.6 % 12.4 % 18.4 % 12.2 %
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Drilling Products - Comparison of Three Months Ended September 30, 2008 and 2007
In February 2008 we acquired substantially all the assets of Teledrift, which specializes in designing and manufacturing wireless survey and measurement while drilling, or MWD, tools. In November 2007 we acquired the remaining 50% interest in CAVO, which specializes in the production, rental, service and sale of high performance mud motors. These acquisitions expanded machining, repair, tool rental and inspection service capability within our Drilling Products group.
Drilling Products revenue increased $12.5 million, or 88.3%, for the three months ended September 30, 2008 compared to the same period in 2007. Acquisitions accounted for approximately $8.6 million of the increase. Growth in rentals and services associated with the expansion of our mud motor fleet contributed $2.6 million to the increase.
Gross profit increased $7.2 million, or 122.9%, for the three months ended September 30, 2008 compared to the same period in 2007. Gross profit as a percentage of revenue increased to 48.9% in the third quarter of 2008 from 41.3% in the third quarter of 2007. The increase in gross profit margin resulted from organic growth and the acquisition of Teledrift and CAVO which generate higher gross profit margins than our existing business.
Income from operations increased $3.7 million, or 211.7%, for the three months ended September 30, 2008 compared to the same period in 2007. Income from operations as a percentage of revenue increased to 20.6% in the third quarter of 2008 from 12.4% in the third quarter of 2007. This increase can also be attributed to the contributions from the Teledrift and CAVO acquisitions and expansion of our rental tool operations.
Drilling Products - Comparison of Nine Months Ended September 30, 2008 and 2007
In February 2008 we acquired substantially all the assets of Teledrift, which specializes in designing and manufacturing wireless survey and measurement while drilling, or MWD, tools. In November 2007 we acquired the remaining 50% interest in CAVO, which specializes in the production, rental, service and sale of high performance mud motors. These acquisitions expanded machining, repair, tool rental and inspection service capability within our Drilling Products group.
Drilling Products revenue increased $27.8 million, or 65.5%, for the nine months ended September 30, 2008 compared to the same period in 2007. Acquisitions accounted for approximately $23.6 million of the increase. Revenue growth was inhibited by a four month delay in receiving spare parts which curtailed the rental of 40% of our mud motor fleet in the second quarter of 2008.
Gross profit increased $15.4 million, or 86.9%, for the nine months ended September 30, 2008 compared to the same period in 2007. Gross profit as a percentage of revenue increased to 47.1% for the nine months ended September 30, 2008 from 41.7% for the same period in 2007. The increase in gross profit margin resulted from organic growth and the acquisitions of Teledrift and CAVO which generate higher gross profit margins than our existing business.
Income from operations increased $7.8 million, or 149.7%, for the nine months ended September 30, 2008 compared to the same period in 2007. Income from operations as a percentage of revenue increased to 18.4% for the nine months ended September 30, 2008 from 12.2% for the same period in 2007. This increase can also be attributed to the contributions from the Teledrift and CAVO acquisitions and expansion of our rental tool operations.
Artificial Lift
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(in thousands)
Revenue $ 5,769 $ 4,273 $ 13,400 $ 10,794
Gross profit 1,686 1,136 3,588 2,703
Gross profit % 29.2 % 26.6 % 26.8 % 25.0 %
Income from operations $ 909 $ 464 $ 1,447 $ 914
Income from operations % 15.8 % 10.9 % 10.8 % 8.5 %
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Artificial Lift - Comparison of Three Months Ended September 30, 2008 and 2007
Artificial lift revenue increased $1.5 million for the three months ended September 30, 2008, compared to the same period in 2007 primarily due to increased drilling activity by our customers in the Powder River basin in Wyoming.
Gross profit increased $0.6 million, or 48.4%, for the three months ended September 30, 2008 compared to the same period in 2007. Gross profit as a percentage of revenue increased to 29.2% in the three months ended September 30, 2008 compared to 26.6% for the same period in 2007 due to increased volume throughput.
Income from operations increased $0.4 million, or 95.9%, for the three months ended September, 30, 2008 compared to the same period in 2007 due to increased volumes. Income from operations as a percentage of revenue increased to 15.8% for the three months ended September 30, 2008 compared to 10.9% for the same period in 2007.
Artificial Lift - Comparison of Nine Months Ended September 30, 2008 and 2007
Artificial lift revenue increased $2.6 million for the nine months ended September 30, 2008, compared to the same period in 2007 primarily due to increased drilling activity by our customers in the Powder River basin in Wyoming.
Gross profit increased $0.9 million, or 32.7%, for the nine months ended September 30, 2008 compared to the same period in 2007. Gross profit as a percentage of revenue increased to 26.8% in the nine months ended September 30, 2008 compared to 25.0% for the same period in 2007. On September 30, 2007, the Company acquired for $2.5 million in cash, the patent underlying the exclusive license agreement which was part of the acquisition of Total Well Solutions, Inc. in April 2006 which relieved annual minimum royalty payment obligations of $0.4 million.
Income from operations increased $0.5 million, or 58.3%, for the nine months ended September 30, 2008 compared to the same period in 2007 due to the volume increase and the elimination of the royalty expense. Income from operations as a percentage of revenue increased to 10.8% for the nine months ended September 30, 2008 compared to 8.5% for the same period in 2007.
Capital Resources and Liquidity
Our ongoing capital requirements arise primarily from our need to service our debt, to acquire and maintain equipment, to fund our working capital requirements and to complete acquisitions. We have funded our capital requirements with operating cash flows, debt borrowings, and by issuing shares of our common stock. We had cash and cash equivalents of $3.2 million at September 30, 2008 compared to $1.3 million at December 31, 2007.
Operating Activities
In the nine months ended September 30, 2008, we generated $23.4 million in cash from operating activities. Net income for the nine months ended September 30, 2008 was $14.4 million. Non-cash additions to net income during the nine months ended September 30, 2008 consisted of $9.4 million of depreciation and amortization and $2.1 million of compensation expense related to options and restricted stock awards as required under FAS No. 123R.
During the nine months ended September 30, 2008, increased working capital requirements decreased operating cash flow by $1.0 million. An increase in inventory levels in the Drilling Products segment and an increase in accounts receivable due to higher sales levels, offset by an increase in accounts payable and accrued liabilities in our Drilling Products and Artificial Lift segments contributed to the increased working capital requirements.
Investing Activities
During the nine month period ended September 30, 2008, we used $113.5 million in investing activities due to the acquisition of Teledrift and capital expenditures. Capital expenditures for the nine months ended September 30, 2008 totaled approximately $16.6 million. The most significant expenditures related to the expansion of our newly acquired Teledrift MWD tools, CAVO mud motor fleet, the addition of rental tools to expand our rental tool base, the completion of the Marlow Oklahoma facility and equipment purchases for the R&D lab in The Woodlands.
Financing Activities
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