Flotek Industries, Inc. Announces First Quarter, 2014 Financial And Operating Results And Conference Call Information
HOUSTON, April 28, 2014 - Flotek Industries, Inc. (NYSE: FTK - News) ("Flotek" or the "Company") today announced results for the three months ended March 31, 2014.
As reported on Form 10-Q filed with the U.S. Securities and Exchange Commission, Flotek reported that revenue for the three months ended March 31, 2014 was $102.6 million compared to $78.2 million for the three months ended March 31, 2013. Consolidated revenue for the three months ended March 31, 2014 increased $24.4 million, or 31.1%, relative to the comparable period of 2013. The increase in revenue was primarily due to the acquisition of Florida Chemical and EOGA, contributing incremental revenue of $16.8 million during the quarter. Excluding the impact of acquisitions, revenue for the quarter ended March 31, 2014, increased by $7.5 million, or 9.6%.
For the three months ended March 31, 2014, the Company reported net income of $12.0 million, or $0.22 per common share (fully diluted), compared to a net income of $7.8 million, or $0.15 per common share (fully diluted) for the same period in 2013.
“Flotek’s performance in the first quarter, including record quarterly revenue, creates a strong base from which to continue our industry-leading growth initiatives for the balance of 2014,” said John Chisholm, Flotek’s Chairman, President and Chief Executive Officer. “While we are pleased with our results – especially given a slow start in January – we believe we are positioned to post solid growth through the balance of the year, especially in our key energy chemistry business. While the second quarter spring break-up has begun in Canada, which will impact chemistry revenue in the quarter, our continued growth in the U.S. as well as incremental international growth provide solid opportunities in the months ahead.”
The Company recorded stock-based compensation expense during the quarter of $2.3 million ($1.5 million, net of tax). That compares to stock-based compensation expense in the first quarter of 2013 of $2.2 million ($1.5 million, net of tax).
Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA (a non-GAAP measure of financial performance), for the three months ended March 31, 2014 was $23.1 million, an increase of $7.6 million or 49%, compared to $15.5 million for the three months ended March 31, 2013.
A presentation of stock-based compensation and a reconciliation of GAAP net income to EBITDA can be found at the conclusion of this release.
A complete review and discussion of the Company's quarter-end financial performance and position can be found in the Company's quarterly report on Form 10-Q filed with the U.S. Securities and Exchange Commission today.
Flotek’s resilient operational performance continues to support a strong balance sheet and financial position. During the quarter, Flotek reduced its outstanding debt by $7.1 million, or 11.5%, compared to year-end levels. In addition, the Company used $5.3 million in cash for the acquisition of Eclipse IOR Services, LLC (“EOGA”) and posted capital expenditures of $4.1 million.
Inventories in the quarter rose by $8.9 million, primarily a result of a traditional seasonal increase in citrus product inventory held at Florida Chemical.
Outstanding receivables as of March 31, 2014 were $65.9 million, compared to $65.0 million as of December 31, 2013. The Company’s allowance for doubtful accounts was at 1.4% of net receivables.
Depreciation and amortization expense for the three months ended March 31, 2014 increased by $1.1 million, or 92.0%, relative to the comparable period of 2013, primarily due to incremental depreciation and amortization of $0.7 million for assets recognized as part of the acquisition of Florida Chemical in 2013.
Interest and other expense for the three months ended March 31, 2014 was essentially flat relative to the comparable period of 2013.
The Company recorded an income tax provision of $6.4 million, yielding an effective tax rate of 34.7% for the three months ended March 31, 2014, compared to an income tax provision of $4.2 million reflecting an effective tax rate of 35.3% for the comparable period in 2013.
“Flotek’s ability to generate cash remains a core strength of Flotek,” added Chisholm. “We are confident of our ability to fund current operations with internally generated cash flow which provides meaningful flexibility to consider other strategic growth opportunities that add value for Flotek shareholders.”
As noted earlier, while January oilfield activity was lethargic, each month in the quarter showed accelerated activity and revenue, a trend – excepting Canadian activity with the beginning of seasonal break-up – that continues into April. Revenue in the first quarter of 2014 was $102.6 million, a Flotek record and the second consecutive quarter with revenues in excess of $100 million.
Energy Chemical Technologies revenue for the three months ended March 31, 2014 totaled $62.4 million, compared to $44.7 million in the year-ago period. Energy Chemical Technologies revenue for the three months ended March 31, 2014 increased $17.7 million, or 39.7%, relative to the comparable period of 2013. Increased sales of stimulation chemical additives accounted for the majority of the revenue increase for the quarter ended March 31, 2014 relative to the comparable period of 2013.
Energy Chemical Technologies gross margins for the quarter were 46.8%, an increase from 42.8% in the first quarter of 2013.The increase in gross margin percentage for the three months ended March 31, 2014 was primarily attributable to product portfolio mix resulting from proportionately higher sales of patented and proprietary products and the supply chain benefits of the Florida Chemical acquisition.
Sequentially, Energy Chemical Technologies revenue for the three months ended March 31, 2014 increased $5.5 million, or 9.6%. Energy Chemical Technologies gross profit for the three months ended March 31, 2014 totaled $29.2 million, an increase of $2.2 million or 8.3% sequentially.
Growth in chemistry revenue was driven by acceleration in both North America and international activity. In the U.S., the Company continues to see solid growth in South Texas with new customers adopting Flotek’s CnF® completion chemistries as well as new opportunities in both West Texas and the Mid-Continent. In addition, use in the Rockies remains robust and has recovered from disruptions from flooding in the second-half of last year.
In Canada, the first quarter saw a significant increase in the number of customers adopting CnF® completion chemistries, a trend the Company believes will continue, resulting in volume growth at the conclusion of the spring break-up season. The Canadian thaw, as is typically the case, will have an impact on April and early May revenues in Canada.
Internationally, Flotek continues to make progress on several fronts. CnF® completion chemistry sales into Argentina increased consistently in the quarter. Our Middle Eastern initiatives continue to yield steady results with opportunities in Oman, the United Arab Emirates and Saudi Arabia continuing to grow. Of special note, through our major service company partners, we have seen meaningful growth in multiple chemistry sales, including CnF® completion chemistries, into Saudi Aramco.
Other international markets continue to contribute to overall chemical sales including Mexico, the Netherlands and Turkey with additional opportunities in those nations as well as Guatemala, Ecuador and elsewhere in Latin and South America, the Middle East and Europe. Flotek continues to make progress on the Gulf Energy joint venture to develop oilfield chemistry and production facilities in the Sultanate of Oman to serve the rapidly growing hydrocarbon markets in the Middle East and North Africa. The companies have completed the definitive joint venture agreements and are working through various regulatory processes in Oman. In addition, Flotek has begun the process of vetting global engineering firms to complete the construction of the chemical manufacturing facility near Sohar. The Company expects to complete the facility by the end of 2014.
Even before completion of the blending infrastructure, the Company is already seeing benefits from the Omani venture. During the first quarter, Flotek held a three-day comprehensive chemistry seminar – with a focus on Enhanced Oil Recovery – with Petroleum Development Oman (“PDO”). PDO, a joint venture between the Sultanate and Royal Dutch Shell, is the largest producer of hydrocarbons in Oman, responsible for nearly 70% of Omani crude oil production. Flotek is encouraged by the opportunity and acceptance of the Company’s chemistry technology and commercial relationship opportunities in the Sultanate.
In addition, Flotek Gulf, the new name of the joint venture, was a sponsor, through Gulf Energy, and exhibitor at the recent OGWA conference and exhibition in Muscat. The conference was attended by over 10,000 oil and gas professionals from the Middle East and Africa and provided a host of solid commercial leads for Flotek Gulf.
“Our commitment to being a leading innovator in oilfield chemistry is beginning to yield results as we continue our solid growth in energy chemistry,” added Chisholm. “While we have plenty of work ahead of us, we are pleased with our success in reaching new clients and basins in North America. Moreover, our plate remains full of additional opportunities that, if successful in converting to commercial business, should accelerate our growth in the coming months.”
“In addition, while still relatively small compared to our North American business, our international prospects continue to develop and become better defined,” Chisholm added. “We continue to be deliberate, focused and conservative in our approach to business in distant lands yet believe that – over the course of the next several quarters – our international portfolio has the potential to be transformational for Flotek and its growth profile.”
Flotek’s recent acquisition of EOGA is an important addition to our energy chemistry and Enhanced Oil Recovery (“EOR”) offerings. Flotek is already experiencing the benefits of expanding EOR services and the expertise that Jay Portwood and his team bring to Flotek’s chemistry offerings. The recent closing of the acquisition of SiteLark, LLC adds reservoir and project modeling and evaluation capabilities to the stable which should further enhance our reputation as a leader in global Enhanced Oil Recovery services.
Energy Chemical Technology margins remained strong in the first quarter as a result of favorable product mix and continued benefits from efficiency improvements at our Marlow, Oklahoma chemistry manufacturing and blending facility. In addition, better control of raw material costs – largely a result of our acquisition of Florida Chemical in 2013 – continues to support strong margins.
In research and product development, Flotek continues to focus on next-generation chemistry solutions for key oil and gas challenges. The company continues to enhance its core CnF® chemistry products as well as work on customized solutions presented to the Company by clients, both domestic and international.
“We remain both proud of and committed to our reputation of being a leading innovator in oilfield chemistry, and our first quarter activity is a strong testament to that commitment,” added Chisholm. “We will continue to work tirelessly to convince our clients and prospects that the use of Flotek chemistries is an investment that yields results, both in terms of production and economics. Over the course of the next several weeks we believe those benefits will become even more clear and compelling.”
The Consumer and Industrial Chemical Technologies (“CICT”) segment was formed in the second quarter of 2013 with the acquisition of Florida Chemical. For the three months ended March 31, 2014 the segment contributed revenue of $13.0 million. CICT revenue is primarily driven by demand for d-Limonene and other bio-based chemistries as well as from citrus isolates produced for the flavor and fragrance industry. Revenue for CICT is subject to market seasonality and availability of raw materials. CICT gross margin for the three months ended March 31, 2014 contributed $4.0 million. Gross margin for the quarter was favorably impacted by proportionally higher sales of high margin flavor and fragrance isolates.
Sequentially, CICT revenue for the three months ended March 31, 2014 decreased $1.9 million, or 12.9%. CICT gross profit for the three months ended March 31, 2014 totaled $4.0 million, an increase of $0.7 million or 19.4% sequentially. Gross margin percentage for the three months ended March 31, 2014 increased to 31.0%, up from 22.6% for the three months ended December 31, 2013.
Drilling Technologies revenue for the three months ended March 31, 2014 totaled $24.9 million, compared to $28.9 million for the three months ended March 31, 2013. Revenue declines can be primarily attributed to a decline in oilfield and mining product sales along with rental revenue declines for actuated tool rentals and Teledrift™ tools.
Drilling Technologies gross margin for the three months ended March 31, 2014 decreased by $1.6 million, or 13.7%, over the comparable period of 2013, but remained relatively flat as a percentage of revenue. Gross margin declined due to decreased revenue, partially offset by an increase in gross margin percentage due to direct cost control including lower employee, supplies, and travel expenses in the first quarter of 2014.
Drilling Technologies revenue for the three months ended March 31, 2014 decreased $1.2 million, or 4.7%, sequentially. Drilling Technologies gross profit for the three months ended March 31, 2014 totaled $9.8 million, an increase of $1.3 million or 14.7% sequentially. Gross margin percentage for the three months ended March 31, 2014 increased to 39.3%, up from 32.6% for the three months ended December 31, 2013.
The decline in revenue is primarily the result of a decline in Teledrift™ rentals in the Mid Continent and Southern regions due to seasonal weather patterns and transient employment and logistics issues. Both regions regained momentum in the later part of the quarter and are continuing to re-accelerate. In addition, although the Stemulator™ agitation tool experienced a slower-than-expected start in January, rentals ended the quarter strong, with March providing the strongest monthly rental revenue to date, a trend Flotek expects to continue in the second quarter.
Internationally, Teledrift™ continues to win accolades and gain traction with key clients. Revenues from Saudi Aramco continue at record levels with additional growth expected throughout the year. While seasonal weakness in Argentina had an impact, we continue to experience new opportunities in Kazakhstan. In the Middle East, a number of new opportunities are developing, including new tools headed to Iraq which should be working in the coming months. Flotek expects Teledrift™ to continue to post international growth throughout the balance of the year.
The Stemulator™, Flotek’s new horizontal drilling acceleration tool, finished the quarter with record revenue in March, after a slow start in January. The Company continues to tweak the design to ensure optimal performance, largely a result of customer feedback. For example, Flotek recently adjusted the pulsing frequency of the tool to minimize interference with signals from directional drilling technologies. Additionally, in the Mid-Continent, the Company is currently running its largest single-customer job with the Stemulator™ and, if successful, expects significant growth in the region beginning late in the second quarter or early in the second-half of the year.
While increased competition presents challenges in many basins, Flotek continues to experience growth in the Permian Basin and is seeing new opportunities in the Eagle Ford and Mid-Continent regions with Rockies activity remaining stable. More important, Drilling Technologies margins were resilient in the quarter, a metric on which the Company remains focused.
The Company’s Galleon mining tools group experienced a decline in backlog and orders, largely due to a decline in overall mining activity in North and South America. While Galleon’s near-term visibility is challenged, the Company believes activity and backlog should begin to redevelop in the later part of 2014 and into 2015.
Flotek is completing its move into a new state-of-the-art facility in Moore, Oklahoma which will house the Company’s Teledrift™, Stemulator™ and Motors operations as well as its Mid-Continent Drilling Technologies division. The new facility is more efficient and allows better coordination and collaboration in the Company’s key drilling technologies.
Revenue for the Production Technologies segment for the quarter ended March 31, 2014 was $2.3 million, a decrease of $2.4 million compared to the same period in 2013. The segment is shifting focus to the unconventional oil markets and the related equipment sales and service. International valve sales decreased year over year due to a contract fulfilled in the first quarter of 2013. Electrical submersible pump sales have also decreased as a result of continued declines in CBM activity. These decreases were partially offset by increases in revenue with linear lift systems and rod valve sales in the Powder River and Williston Basins unconventional oil markets.
“As we noted earlier this year as we begin to reengineer our Production Technologies enterprise, 2014 results are likely to be variable,” added Chisholm. “While we will continue to provide exceptional service to our legacy clients, our longer-term focus is on opportunistic products and services where we can make a difference to clients in providing innovative solutions to niche production challenges. Hence, as we reimagine the business, we believe Production Technologies better describes the business prospects ahead. In the coming months we will consider a wide-range of opportunities – from intrinsic development to acquisitive ventures – that we believe will create an industry leading business. Under David McMahon’s leadership, we are already beginning to see meaningful opportunities ahead.”
“Overall, while pleased with our first quarter results, we are more excited about what lies ahead for the balance of the year for Flotek,” concluded Chisholm. “We believe Flotek can post industry-leading results through focusing on superior innovation in oilfield technologies, executing our marketing and sales strategy and having an ever-more vigilant focus on profitable growth. Moreover, we now firmly believe we can add to that success through a prudent review of external growth opportunities which stand in support of our core strategy: making a positive difference for our clients while at the same time focusing on making a difference for our other stakeholders: our employees and their communities, our shareholders and the environment. If successful in the execution of our vision, we believe 2014 will once again be a transformational year for all Flotek stakeholders.”
Conference Call Details
Flotek will host a conference call on Tuesday, April 29, 2014 at 7:30 a.m. Central Daylight Time to discuss its operating results for the three months ended March 31, 2014.
To participate in the call, participants should dial 800-679-0308 approximately 5 minutes prior to the start of the call. The call can also be accessed from Flotek's website at www.flotekind.com.
About Flotek Industries, Inc.
Flotek is a global developer and distributor of innovative specialty chemicals and down-hole drilling and production equipment. Flotek manages automated bulk material handling, loading and blending facilities. It serves major and independent companies in the domestic and international oilfield service industry. Flotek Industries, Inc. is a publicly traded company headquartered in Houston, Texas, and its common shares are traded on the New York Stock Exchange under the ticker symbol "FTK"
For additional information, please visit Flotek's web site at www.flotekind.com.
Certain statements set forth in this Press Release constitute forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) regarding Flotek Industries, Inc.'s business, financial condition, results of operations and prospects. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Press Release.
Although forward-looking statements in this Press Release reflect the good faith judgment of management, such statements can only be based on facts and factors currently known to management. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, demand for oil and natural gas drilling services in the areas and markets in which the Company operates, competition, obsolescence of products and services, the Company's ability to obtain financing to support its operations, environmental and other casualty risks, and the impact of government regulation.
Further information about the risks and uncertainties that may impact the Company are set forth in the Company's most recent filing on Form 10-K (including without limitation in the "Risk Factors" Section), and in the Company's other SEC filings and publicly available documents. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Press Release. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Press Release.
GAAP Accounting Reconciliation