Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
FTK > SEC Filings for FTK > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for FLOTEK INDUSTRIES INC/CN/

Form 10-Q for FLOTEK INDUSTRIES INC/CN/


6-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q (the "Quarterly Report"), and in particular, Part I, Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains "forward-looking statements" within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Forward-looking statements are not historical facts, but instead represent the Company's current assumptions and beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside the Company's control. Such statements include estimates, projections, and statements related to Flotek Industries, Inc.'s ("Flotek" or the "Company") business plan, objectives, expected operating results and assumptions upon which those statements are based. The forward-looking statements contained in this Quarterly Report are based on information available as of the date of this Quarterly Report.
The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company's business, future operating results and liquidity. These forward-looking statements generally are identified by words including, but not limited to, "anticipate," "believe," "estimate," "continue," "intend," "expect," "plan," "forecast," "project" and similar expressions, or future-tense or conditional constructions such as "will," "may," "should," "could," etc. The Company cautions that these statements are merely predictions, and are not to be considered guarantees of future performance. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied.
A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements is included in Part I, Item 1A - "Risk Factors" of the Annual Report on Form 10-K for the year ended


Table of Contents

December 31, 2012 (the "Annual Report") and periodically in subsequent reports filed with the Securities and Exchange Commission (the "SEC"). The Company has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the unaudited consolidated condensed financial statements and the related notes thereto, as well as our Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Annual Report"). Phrases such as "Company," "we," "our" and "us" refer to Flotek Industries, Inc. and its subsidiaries. Executive Summary
Flotek is a diversified, technology-driven company that develops and supplies oilfield products, services and equipment to the oil, gas and mining industries, and high value compounds to companies that make cleaning products, cosmetics, food and beverages and other products that are sold in the consumer and industrial markets.
The Company's oilfield businesses include specialty chemicals and logistics, down-hole drilling tools and down-hole production-related tools. Flotek's technologies enable customers to drill wells more efficiently, increase well production and decrease well operating costs. The Company also provides automated bulk material handling, loading facilities and blending capabilities. Through its acquisition of Florida Chemical Company (See Note 3 - Acquisition of Florida Chemical Company, hereafter, "Florida Chemical") in May 2013, Flotek sources citrus oil domestically and internationally and is the largest processor of citrus oil in the world. Products produced from processed citrus oil include
(1) high value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemicals for use in numerous industries around the world, specifically oil and gas ("O&G") industries. The Company has combined the research efforts of the newly acquired business with its previously existing organic R&D effort to strengthen its focus on developing environmentally responsible products for the oil and gas industry and other markets. Flotek operates in over 20 domestic and international markets, including the Gulf Coast, Southwest, Rocky Mountains, Northeastern and Mid-Continental regions of the United States (the "U.S."), Canada, Mexico, Central America, South America, Europe, Africa, Middle East, Australia and Asia-Pacific. Customers include major integrated O&G companies, oilfield services companies, independent O&G companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies. As a result of its Florida Chemical acquisition, customers now also include non-energy-related citrus oil users, including household and commercial cleaning product companies, fragrance and cosmetic companies, and food manufacturing companies. The operations of the Company are categorized into four reportable segments:
Energy Chemical Technologies (formerly known as "Chemical Technologies,"), Consumer and Industrial Chemical Technologies (formerly known as "Non-Energy Chemical Technologies,"), Drilling Technologies and Artificial Lift Technologies.

• Energy Chemical Technologies designs, develops, manufactures, packages and markets specialty chemicals used in O&G well cementing, stimulation, acidizing, drilling and production. Activities in this segment also include construction and management of automated material handling facilities and management of loading facilities and blending operations for oilfield services companies.

• Consumer and Industrial Chemical Technologies designs, develops and manufactures products that are sold to companies in the flavor and fragrance industries and specialty chemical industry. These technologies are used by beverage and food companies, fragrance companies, and companies providing household and industrial cleaning products.

• Drilling Technologies rents, sells, inspects, manufactures and markets down-hole drilling equipment used in energy, mining, water well and industrial drilling activities.

• Artificial Lift Technologies assembles and markets artificial lift equipment, including the Petrovalve product line of rod pump components, electric submersible pumps, gas separators, valves and services that support natural gas, oil and coal bed methane production activities.

Market Conditions
The Company's success is sensitive to a number of factors, which include, but are not limited to, drilling activity, customer demand for its advanced technology products, market prices for raw materials and governmental actions.


Table of Contents

Drilling activity levels are influenced by a number of factors, including the number of rigs in operation, the geographical areas of rig activity, and drill rig efficiency (rig days required per well). Additional factors that influence the level of drilling activity include:
• Historical, current, and anticipated future O&G prices,

• Federal, State and local governmental actions that may encourage or discourage drilling activity,

• Customers' strategies relative to capital funds allocations,

• Weather conditions, and

• Technological changes to drilling methods and economics.

Historical North American drilling activity is reflected in "TABLE A" below:
Customers' demand for advanced technology products and services provided by the Company are dependent on their recognition of the value of:
• Chemistries that improve the economics of their O&G operations,

• Drilling products that improve drilling operations and efficiencies, and

• Chemistries that are economically viable, socially responsible and ecologically sound.

Market prices for citrus oils can be influenced by:
• Historical, current, and anticipated future production levels of the global citrus (primarily orange) crop,

• Weather related risks, and

• Health and condition of citrus trees (e.g., disease and pests).

Governmental actions may restrict the future use of hazardous chemicals, including but not limited to, the following industrial applications:
• O&G drilling and completion operations,

• O&G production operations, and

• Non-O&G industrial solvents.

TABLE A
                                  Three months ended September 30,      Nine months ended September 30,
                                    2013        2012     % Change         2013         2012     % Change
North American Average Active
Drilling Rigs
U.S.                                1,770      1,906         (7.1 )%       1,763      1,955       (9.8 )%
Canada                                350        325          7.7  %         349        362       (3.6 )%
Total Average North American
Drilling Rigs                       2,120      2,231         (5.0 )%       2,112      2,317       (8.8 )%
U.S. Average Active Drilling
Rigs by Type
Vertical                              436        531        (17.9 )%         443        567      (21.9 )%
Horizontal                          1,073      1,153         (6.9 )%       1,096      1,164       (5.8 )%
Directional                           261        222         17.6  %         224        224          -  %
Total Average U.S. Drilling Rigs
by Type                             1,770      1,906         (7.1 )%       1,763      1,955       (9.8 )%
Oil vs. Natural Gas Average
North American Drilling Rigs
Oil                                 1,609      1,658         (3.0 )%       1,610      1,611       (0.1 )%
Natural Gas                           511        573        (10.8 )%         502        706      (28.9 )%
Total Average Oil vs Natural Gas
Drilling Rigs                       2,120      2,231         (5.0 )%       2,112      2,317       (8.8 )%
U.S. Average Wells Drilled per
Quarter per Rig                      5.37       5.07          5.9  %        5.21       4.92        5.9  %

Source: Rig and well counts are per Baker Hughes, Inc. (www.bakerhughes.com). Rig counts are the averages of the weekly rig count activity. Well counts are the number of wells drilled in the reporting period divided by the average weekly rig count.
During the three and nine months ended September 30, 2013, total North American active drilling rig count saw a decrease when compared to the comparable periods of 2012, primarily in natural gas drilling rigs. Publicly available data from Baker Hughes indicates that rigs are becoming more efficient, drilling more wells per quarter per rig as various drilling and support technology efficiencies make their way into the market. Although overall U.S. rig activity decreased 7.1% and 9.8% for the three and nine months ended September 30, 2013 compared to 2012, respectively, the number of wells drilled per rig per quarter increased from


Table of Contents

5.07 and 4.92 for the three months and nine months ending September 30, 2012 to 5.37 and 5.21 for the same periods in 2013, respectively.
U.S. drilling rigs by type showed a modest shift with decreases ranging from 5.8% to 6.9% in drilling rig activity by horizontal drilling rigs for the three and nine months ended September 30, 2013 periods when compared to the comparable periods of 2012, a decrease of 17.9% and 21.9% in vertical drilling rig activity for the three and nine months ended September 30, 2013, respectively, when compared to the 2012 periods, and an increase in directional drilling rigs for the three months ended September 30, 2013 of 17.6% when compared to 2012. Average North American oil drilling rig activity decreased by 3.0% and 0.1% for the three and nine months ended September 30, 2013, respectively, when compared to the same periods of 2012. North American natural gas drilling rigs have decreased by 10.8% and 28.9% for the three and nine months ended September 30, 2013, respectively, compared to the same periods of 2012. Company Outlook
Future economic conditions are expected to remain consistent with recent market conditions. Increases in drilling rig operating efficiencies noted above are resulting in pricing pressure on rig-based operations. To some extent, those pressures impact drilling suppliers such as Flotek, especially in our Drilling Technologies segment. Our tools are being leased for a smaller amount of time per well drilled, which is partially offset by the expansion in the number of wells being drilled per quarter per rig.
The Company is expanding its Energy Chemical Technologies production capacity in response to increasing customer demand. In addition, the Company is continuing to expand Drilling Technologies' product offerings. The Company continues to pursue and develop new and existing market opportunities associated with the Company's specialty chemical and drilling technology products. Capital expenditures, exclusive of acquisitions, totaled $10.0 million and $15.2 million for the nine months ended September 30, 2013 and 2012, respectively. The Company pursues acquisitions when strategic opportunities arise.
The Company continues to pursue selected strategic relationships, both domestically and internationally, to expand its business:

•         In March 2013, the Company entered into a Letter of Intent with an
          Affiliate of Gulf Energy, LLC, a leading Oman-based oil and gas
          concern, to construct an advanced oilfield chemistry production
          facility and state-of-the-art R&D organization to address the growing
          need for advanced oilfield chemistries in the Middle East and North
          Africa.



•         In July 2013, the Company entered into a non-binding Letter of Intent
          to acquire Eclipse IOR Services, LLC, a leading provider of enhanced
          recovery technologies for O&G producers.



•         In August 2013, the Company entered into an agreement with AlMansoori
          Production Service Company of Abu Dhabi in the UAE to provide certain
          chemistry technologies.

The Company believes governmental reaction to constituents' environmental concerns regarding the hydraulic fracturing process and the use of hazardous chemicals in O&G operations could work to its advantage. These environmental concerns favor our chemistries as economical replacements for more hazardous chemicals currently in use in many drilling and producing operations. California and Colorado have grass-roots, citizen movements that are aimed specifically at "greening" the hydraulic fracturing process, and management believes it is likely these environmental concerns/reactions will broaden to other states in the quarters to come.
The outlook for the Company's consumer and industrial chemistries will be driven by availability and demand for citrus oils and other bio-based raw materials. Current crop expectations for the fourth quarter of 2013 and beyond are sufficient to meet the Company's needs to supply its flavor and fragrance business as well as the industrial markets. However, market price volatility will likely result in revenue and margin fluctuations from quarter to quarter. The Company works to maintain a portfolio of products which are adaptable to meet our customers' demands for customized products for the various drilling and producing environments in which they operate. The Company's commitment to research and development ("R&D") permits the Company to remain responsive to increased demand and continued growth. The Company remains committed to continued development of its product technologies and believes the new growth of its business through the recent acquisition of Florida Chemical will strategically advance its existing assets and technologies to better serve our customers' needs. The Company believes that it is well-positioned to respond to increased demand for the Company's suite of hydrocarbon stimulation and completion products, particularly the Company's Complex nano-Fluid Chemistries. In addition, the Company anticipates continued strong demand for its Teledrift Pro-series tool product lines and its recently introduced Stemulator™ tool.


Table of Contents

Changes to global geo-political and economic events could have an impact, either positive or negative, on the Company's business. In the event of significant adverse changes to the demand for O&G production, the market conditions affecting the Company could change quickly and materially. Should such adverse changes to market conditions occur, management believes the Company has adequate liquidity to withstand the impact of such changes. In addition, management believes the Company is well-positioned to take advantage of significant increases in demand for its products should market conditions improve dramatically in the near term.
Consolidated Results of Operations (in thousands):

                                  Three months ended September 30,           Nine months ended September 30,
                                      2013                 2012                 2013                 2012
Revenue                        $        98,388       $        78,628     $       270,217       $       236,126
Cost of revenue                         60,886                44,785             162,491               135,807
Gross margin                            37,502                33,843             107,726               100,319
  Gross margin %                          38.1 %                43.0 %              39.9 %                42.5 %
Selling, general and
administrative costs                    19,542                17,171              58,640                47,860
  Selling, general and
administrative costs %                    19.9 %                21.8 %              21.7 %                20.3 %
Depreciation and
amortization                             2,038                 1,170               5,231                 3,166
Research and development                   835                   909               2,689                 2,363
Income from operations                  15,087                14,593              41,166                46,930
  Income from operations %                15.3 %                18.6 %              15.2 %                19.9 %
Loss on extinguishment of
debt                                         -                     -                   -                (6,386 )
Change in fair value of
warrant liability                            -                     -                   -                 2,649
Interest and other expense,
net                                       (471 )              (1,847 )            (1,378 )              (6,612 )
Income before income taxes              14,616                12,746              39,788                36,581
Income tax expense                      (5,648 )              (2,940 )           (14,615 )              (9,991 )
Net income                     $         8,968       $         9,806     $        25,173       $        26,590
  Net income %                             9.1 %                12.5 %               9.3 %                11.3 %

Consolidated Results of Operations: Three and Nine Months Ended September 30, 2013 Compared to the Three and Nine Months Ended September 30, 2012 Consolidated revenue for the third quarter and year to date periods ended September 30, 2013 increased $19.8 million, or 25.1%, and $34.1 million, or 14.4%, respectively, relative to the comparable periods of 2012. The increase in revenue for both periods was primarily due to the acquisition of Florida Chemical, contributing incremental revenue of $18.6 million during the quarter and $33.1 million for the nine month period. Excluding the impact of the acquisition, revenue for the quarter ended September 30, 2013 increased by $1.2 million or 1.5% to $79.8 million. Excluding the impact of the acquisition, year to date revenue increased $1.0 million or 0.4% when compared with the year to date 2012 revenue while the total average North American drilling rig count decreased by 8.8%. Revenue increases in the Energy Chemical Technologies segment were partially offset by revenue declines in the Drilling Technologies segment. Consolidated gross margin for the quarter and year to date periods ended September 30, 2013 increased $3.7 million, or 10.8%, and $7.4 million, or 7.4%, respectively, relative to comparable periods of 2012. The increase in gross margin compared to the third quarter and year to date periods was primarily due to the increase in revenue. Gross margin percentage declined in both quarterly and year over year comparisons. The decline in gross margin percentage was primarily attributable to portfolio mix resulting from the inclusion of Florida Chemical in 2013 results and proportionately higher sales of nonproprietary products in the Energy Chemical Technologies segment, partially offset by supply chain benefits from the Florida Chemical acquisition and proportionately higher sales of technology tools in the Drilling Technologies segment. Selling, general and administrative expenses ("SG&A") are not directly attributable to products sold or services provided. SG&A for the quarter ended September 30, 2013 increased by $2.4 million, or 13.8% compared to the same period of 2012. Excluding the incremental SG&A costs of the Florida Chemical business acquired, SG&A costs increased $0.2 million, or 1.2% compared


Table of Contents

to the same period of 2012. SG&A costs as a percentage of revenue declined from 21.8% to 19.9% in the three months ended September 30, 2013 versus the same period of 2012 as revenues grew significantly faster than SG&A costs. SG&A costs for the year to date period ended September 30, 2013 increased by $10.8 million, or 22.5% compared to the same period of 2012. Excluding the incremental SG&A costs of the Florida Chemical business acquired, SG&A costs increased $6.9 million primarily due to costs incurred in 2013 related to executive severance ($1.0 million), implementation of the Company's new ERP system ($0.8 million), and expenses related to the pursuit of acquisitions and major initiatives in international markets ($1.6 million). Excluding these items and the incremental SG&A costs of the Florida Chemical business, SG&A costs increased $3.4 million or 7.1% primarily due to increases in headcount, general insurance, and travel related costs.
Depreciation and amortization expense for the quarter and year to date periods ended September 30, 2013 increased by $0.9 million or 74.2%, and $2.1 million or 65.2% relative to comparable periods of 2012, respectively. This increase for the quarter ($0.8 million) and year to date ($1.4 million) periods was primarily attributable to incremental depreciation and amortization of assets recognized as part of the acquisition of Florida Chemical.
R&D expense decreased $0.1 million or 8.1% for the quarter ended September 30, 2013 and increased $0.3 million or 13.8% for the year to date period ended September 30, 2013, respectively, over the comparable periods of 2012. The increase in R&D is primarily attributable to new product development, and Flotek's commitment to remaining responsive to increased demand and continued growth of our existing product lines. Management remains committed to R&D investment.
Interest and other expense for the quarter and year to date periods ended September 30, 2013 decreased by $1.4 million, or 74.5%, and $5.2 million, or 79.2% relative to comparable periods of 2012, respectively. The decline in interest expense was primarily due to the repayment of the Company's convertible notes of $50.3 million at the end of the fourth quarter of 2012 and $5.2 million during the first quarter of 2013.
The Company recorded an income tax provision of $5.6 million for the quarter ended September 30, 2013, yielding an effective tax rate of 38.6%, compared to an income tax provision of $2.9 million for the quarter ended September 30, 2012, yielding an effective tax rate of 23.1%. The income tax provision was $14.6 million yielding an effective tax rate of 36.7% for the nine months ended September 30, 2013, compared to an income tax provision of $10.0 million reflecting an effective tax rate of 27.3% for the comparable period in 2012. Fluctuations in effective tax rates were historically impacted by non-cash changes in the fair value of the Company's warrant liability, permanent tax differences with no associated income tax impact, and existing deferred tax asset valuation allowances.

Results by Segment
Energy Chemical Technologies
(dollars in thousands)
                                  Three months ended September 30,           Nine months ended September 30,
                                      2013                 2012                 2013                 2012
Revenue                        $        51,670       $        44,189     $       144,029       $       137,827
Gross margin                            21,849                20,774              61,548                61,856
Gross margin %                            42.3 %                47.0 %              42.7 %                44.9 %
Income from operations                  16,247                16,530              45,300                50,005
Income from operations %                  31.4 %                37.4 %              31.5 %                36.3 %

Energy Chemical Technologies Results of Operations: Three and Nine Months Ended September 30, 2013 Compared to the Three and Nine Months Ended September 30, 2012
Energy Chemical Technologies revenue for the quarter ended September 30, 2013 increased $7.5 million, or 16.9%, relative to the comparable period of 2012. Excluding the incremental revenue impact of the Florida Chemical acquisition of $3.3 million, revenue increased $4.2 million or 9.4% for the quarter ended September 30, 2013 compared to the same period of 2012. Increased sales of stimulation chemical additives accounted for the majority of the revenue increase for the quarter ended September 30, 2013 relative to the comparable period of 2012. Energy Chemical Technologies revenue for year to date ended September 30, 2013 increased $6.2 million, or 4.5%, relative to the comparable period of 2012. Excluding the incremental revenue impact of the Florida Chemical acquisition of $5.1 million, revenue was relatively flat compared to the period ended September 30, 2012.


Table of Contents

Management estimates a negative impact to sales revenue in September 2013 in excess of $3.0 million due to reduced oilfield activity as a result of record rainfalls and flooding in Colorado.
Energy Chemical Technologies' gross margin for the quarter ended September 30, 2013 increased $1.1 million, or 5.2% and decreased $0.3 million, or 0.5% for the nine months ended September 30, 2013. The increase in gross margin for the third . . .

  Add FTK to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for FTK - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.