2013 Annual Report
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Flotek Industries, Inc.
10603 W. Sam Houston Pkwy N
Suite 300
Houston, TX 77064
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2013
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
to
Commission File Number 1-13270
È
‘
FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
10603 W. Sam Houston Parkway N. #300
Houston, TX
(Address of principal executive offices)
90-0023731
(I.R.S. Employer
Identification No.)
77064
(Zip Code)
(713) 849-9911
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 par value
Name of each exchange on which registered
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark:
•
•
•
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È
if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È
whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘
•
whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes È No ‘
•
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
•
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Smaller reporting company ‘
•
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2013 (based on the
closing market price on the NYSE Composite Tape on June 30, 2013) was approximately $897,461,000. At January 31,
2014, there were 51,899,901 outstanding shares of the registrant’s common stock, $0.0001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III of the Annual Report on Form 10-K is incorporated by reference to the registrant’s
definitive proxy statement to be filed pursuant to Regulation 14A for the registrant’s 2014 Annual Meeting of
Stockholders.
[THIS PAGE INTENTIONALLY LEFT BLANK]
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
5
18
18
19
19
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
22
23
42
44
85
85
85
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . .
Item 14.
Principle Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86
86
86
86
86
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
87
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
i
FORWARD-LOOKING STATEMENTS
II,
instead
represent
the Company’s
This Annual Report on Form 10-K (the “Annual
Report”), and in particular, Part
Item 7 –
“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.
Forward-looking statements are not historical facts
but
current
assumptions and beliefs regarding future events,
many of which, by their nature, are inherently
uncertain and outside the Company’s control. The
forward-looking statements contained in this Annual
Report are based on information available as of the
date of this Annual 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
“estimate,”
such
“anticipate,”
“believe,”
as
“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” in this Annual Report and periodically in
future 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.
ii
PART I
Item 1.
Business.
General
Flotek Industries, Inc. (“Flotek” or the “Company”)
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.
In December 2007, the Company’s common stock
began trading on the New York Stock Exchange
(“NYSE”) under the stock ticker symbol “FTK.”
Annual reports on Form 10-K, quarterly reports on
reports on Form 8-K, and
Form 10-Q, current
amendments to those reports filed or
furnished
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, (the “Exchange Act”) are
posted
website,
www.flotekind.com, as soon as practicable subsequent
to electronically filing or furnishing to the SEC.
Information contained in the Company’s website is
not to be considered as part of any regulatory filing.
As used herein, “Flotek,” the “Company,” “we,”
“our” and “us” refers to Flotek Industries, Inc. and/or
the Company’s wholly owned subsidiaries. The use
of
intended to connote any
particular corporate status or relationship.
these terms is not
Company’s
the
to
Historical Developments
The Company was originally incorporated in the
Province of British Columbia on May 17, 1985. In
October 2001, the Company moved the corporate
domicile to Delaware and effected a 120 to 1 reverse
stock split by way of a reverse merger with CESI
Chemical, Inc. (“CESI”). Since then, the Company
has grown through a series of acquisitions and
organic growth.
In May 2013,
the Company acquired Florida
Chemical Company, Inc. (“Florida Chemical”) the
world’s largest processor of citrus oils and a pioneer
in solvent, chemical
synthesis, and flavor and
fragrance applications from citrus oils.
1
Description of Operations and Segments
Chemical
Technologies
The Company has four strategic business segments:
Energy
(formerly
“Chemicals & Logistics”), Consumer and Industrial
Chemical Technologies (acquired as part of Florida
Chemical merger,) Drilling Technologies (formerly
“Drilling Products”) and Artificial Lift Technologies
(formerly “Artificial Lift”). The Company offers
competitive products and services derived from
technological advances, some of which are patented,
that are reactive to industry demands
in both
domestic and international markets.
Financial information about operating segments and
geographic concentration is provided in Note 17 –
“Segment Information” in Part II, Item 8 – “Financial
Statements and Supplementary Data” in this annual
report.
Information about
segments is below.
the Company’s four operating
Energy Chemical Technologies
in
use
possess
drilling,
specialty
customer
cementing,
business
The Energy Chemical Technologies
provides oil and natural gas field specialty chemicals
for
completion,
stimulation and production activities designed to
maximize recovery in both new and mature fields.
enhanced
chemicals
These
performance characteristics and are manufactured to
withstand a broad range of downhole pressures,
temperatures and other well-specific conditions to be
specifications. The
compliant with
Company has two operational
laboratories: (1) a
technical services laboratory and (2) a research and
development
laboratory. Each focuses on design
improvements, development and viability testing of
formulations,
new chemical
continued
enhancement
products. Chemicals
existing
branded Complex nano-Fluid™ technologies (“CnF®
are patented both domestically and
products”)
internationally
strategically
are
cost-effective performance additives within both oil
and natural gas markets. The CnF® products
stable
mixtures
environmentally
friendly,
proven
and
and
are
of
mixtures of oil, water and surface active agents
which organize molecules into nanostructures. The
combined advantage of solvents, surface active
agents and water and the resultant nano structures
improves well treatment results as compared to the
independent use of solvents and surface active
agents. CnF® products is composed of renewable,
plant derived, cleaning ingredients and oils that are
certified as biodegradable. Certain CnF® products
have been approved for use in the North Sea, which
has
field
environmental
in the world. CnF®
chemistries have also helped achieve improved
operational and financial results for the Company’s
customers in low permeability sand and shale
reservoirs.
the most
standards
stringent
some
oil
of
The Logistics division of the Company’s Energy
Chemical Technologies segment designs, operates
and manages automated bulk material handling and
loading facilities. The bulk facilities handle dry
cement and additives for oil and natural gas well
cementing, and supply materials used in oilfield
operations.
Consumer and Industrial Chemical Technologies
in the
An additional segment, Consumer and Industrial
Chemicals Technologies (“CICT”), was added with
the acquisition of Florida Chemical in May 2013.
The Company sources citrus oil domestically and
internationally and is the largest processor of citrus
oils in the world. Products produced from processed
citrus oil include (1) high value compounds used as
additives by companies
and
fragrances markets and (2) environmentally friendly
chemicals for use in the oil & gas industry and
around the world.
numerous other
Consumer and Industrial Chemical Technologies
designs, develops and manufactures products that
are sold to companies in the flavor and fragrance
industry and specialty chemical
industry. These
technologies are used by beverage and food
companies, fragrance companies, and companies
providing
cleaning
and
products.
household
industries
industrial
flavors
Drilling Technologies
The Company is a leading provider of downhole
drilling tools for use in oilfield, mining, water-well
and industrial drilling activities. Further,
the
Company manufactures, sells, rents and inspects
2
jars,
specialized equipment used in drilling, completion,
production, and work-over activities. Established
tool
rental operations are strategically located
throughout the United States (the “U.S.”) and in an
increasing number of international markets. Rental
reamers,
tools include stabilizers, drill collars,
survey,
wipers,
subs, wireless
shock
measurement while
tools,
Stemulator™ tools and mud-motors. Equipment
equipment,
sold
cementing
drilling motor
components. The Company remains focused on
product marketing in all regions of the U.S., as well
as in select
international markets through both
direct and agent-based sales.
includes mining
accessories
(“MWD”)
primarily
drilling
and
Artificial Lift Technologies
valves,
pumping
Company
separators,
production
The
system
provides
components, electric submersible pumps (“ESPs”),
and
gas
complementary services. Artificial Lift products
satisfy the requirements of coal bed methane and
traditional oil and natural gas production and assist
natural gas, oil and other fluids movement from the
producing horizon to the surface. Patented products
within the Company’s Petrovalve™ product
line
optimize pumping efficiency in horizontal well
completions as well as in heavy oil wells and wells
with high liquid to gas ratios. Petrovalve products
placed horizontally increase flow per stroke and
eliminate gas locking of traditional ball and seat
valves that traditionally require more maintenance.
is
The
particularly effective in coal bed methane production,
efficiently separating gas and water downhole as well
as ensuring solution gas is not
in water
production. Gas separated downhole contributes to a
reduction in the environmental impact of escaped gas
at the surface. The majority of Artificial Lift products
are manufactured in China, assembled domestically,
and distributed globally.
technology
separation
patented
lost
gas
Seasonality
Overall, operations are not affected by seasonality.
While certain working capital components build
and recede throughout the year in conjunction with
established purchasing and selling cycles that can
impact operations and financial position,
these
to date. The
cycles have not been significant
performance of certain services within each of the
is susceptible to
Company’s segments, however,
both weather and naturally occurring phenomena,
including:
‰
‰
‰
‰
and
severity
duration
the
of winter
temperatures in North America, which impacts
natural gas storage levels, drilling activity and
commodity prices;
the timing and duration of the Canadian spring
impact
thaw and resulting restrictions that
activity levels;
the timing and impact of hurricanes upon
coastal and offshore operations; and
certain Federal land drilling restrictions during
identified breeding seasons of protected bird
species in key Rocky Mountain coal bed
methane producing regions. These restrictions
generally have a negative impact on Artificial
Lift operations in the first or second quarters of
the year.
Product Demand and Marketing
contractual
Demand for the Company’s products and services is
dependent on levels of conventional and non-
conventional oil and natural gas well drilling and
production, both domestically and internationally.
Products are marketed directly to customers through
the Company’s direct sales force and through
certain
arrangements.
Established customer relationships provide repeat
sales opportunities within all segments. Marketing
concentrated within
is
the U.S.
Internationally,
the Company primarily markets
products and services through the use of third party
agents as well as direct sales in Canada, Mexico,
Central America, South America, Europe, Africa,
the Middle East, Australia, and Asia-Pacific.
currently
agency
Customers
and cosmetic
cleaning product
The Company’s customers include major integrated
oil and natural gas companies, independent oil and
natural gas companies, pressure pumping service
companies, state-owned oil companies, household
and commercial
companies,
companies, and food
fragrance
the year ended
manufacturing companies. For
December 31, 2013,
the Company had three
customers that accounted for 16%, 7% and 7% of
consolidated revenue, respectively. For the years
ended December 31, 2012 and 2011, the Company
had a single customer that accounted for 16% and
13% of our consolidated revenue, respectively. In
3
aggregate,
the Company’s top three customers
collectively accounted for 30%, 35% and 28% of
consolidated
ended
December 31, 2013, 2012 and 2011, respectively.
revenue
years
the
for
Research and Development
is
engaged in research
The Company
and
development activities focused on the improvement
of existing products and services,
the design of
specialized “customer need” products, and the
development of new products, processes and
services. For the years ended December 31, 2013,
2012 and 2011, the Company incurred $3.8 million,
respectively of
$3.2 million and $2.3 million,
In 2013,
research and development
was
development
and
research
approximately 1.0% of consolidated revenue. The
Company has combined the research efforts of its
newly acquired business with its previously existing
R&D effort to strengthen its focus on developing
environmentally responsible products for the oil and
gas industry and other markets. The Company
expects that
its 2014 research and development
investment will be commensurate with the growth
of the business.
expense.
expense
Backlog
Due to the nature of the Company’s contractual
customer relationships and the way they operate,
the Company has historically not had significant
backlog order activity.
Intellectual Property
to
have
deemed
The Company’s policy is to protect its intellectual
property, both within and outside of the U.S. The
Company pursues patent protection for all products
and methods
commercial
significance and that qualify for patent protection.
The decision to pursue patent protection is
dependent upon whether patent protection can be
obtained, cost-effectiveness and alignment with
operational and commercial interests. The Company
believes its patents and trademarks, combined with
trade secrets, proprietary designs, manufacturing
and operational expertise, are appropriate to protect
intellectual property and ensure continued strategic
advantages. The Company currently has existing
and pending patents on casing centralizer design,
ProSeries™ tool design and various chemical
products.
Competition
Raw Materials
upon
ability
in oil
the Company’s
The ability to compete in the oilfield services
industry and the consumer and industrial markets is
to
dependent
differentiate products and services, provide superior
quality and service, and maintain a competitive cost
structure. Activity levels
field services
industry are impacted by current and expected oil
and natural gas prices, vertical and horizontal
drilling rig count, other oil and natural gas drilling
activity, production levels and customer drilling and
production designated capital spending. Domestic
and international regions in which Flotek operates
are highly competitive. The unpredictability of the
energy industry and commodity price fluctuations
create both increased risk and opportunity for the
services of both the Company and its competitors.
Certain oil and natural gas service companies
competing with the Company are larger and have
access to more resources. Such competitors could
be better situated to withstand industry downturns,
compete on the basis of price, and acquire and
develop new equipment and technologies; all of
the Company’s revenue and
which could affect
profitability. Oil and natural gas service companies
also compete for customers and strategic business
opportunities. Thus, competition could have a
detrimental impact upon the Company’s business.
The d-Limonene terpene is a major feedstock for
many of the Company’s CnF® chemistries. The
Company faces competition from other citrus
processors and other solvent sources. Pine oil
provides an effective, but lower quality, substitute to
the Company’s citrus-based terpenes. Pine terpenes
are cheaper than citrus terpenes, but they contain
(benzene,
trace amounts of BTEX compounds
toluene, ethylbenzene, and xylenes), and volatile
organic compounds that have varying degrees of
toxicity. The Company’s chemistries are intended to
replace these undesirable qualities. Management
believes
constituents will
continue to promote BTEX substitutes, which
diminishes the threat of substitution in ecologically
sensitive applications from these competitors. The
Company can use pine terpenes in some of its
industrial product line and currently uses over six
million pounds of pine terpenes annually. That
annual volume could be increased to over 12 million
pounds without adversely affecting the Company’s
“green” product lines.
environmental
that
Materials and components used in the Company’s
servicing and manufacturing operations, as well as
those purchased for sale, are generally available on
the open market from multiple sources. Collection
and transportation of raw materials to Company
facilities however could be adversely affected by
extreme weather conditions. Additionally, certain
raw materials used by the Chemicals segments are
available from limited sources. Disruptions
to
suppliers could materially impact sales. The prices
paid for raw materials vary based on energy, steel,
citrus, and other commodity price fluctuations,
tariffs, duties on imported materials,
foreign
currency exchange rates, business cycle position
and global demand. Higher prices for chemicals,
steel,
could
adversely
contract
fulfillments.
raw materials
sales
and other
future
impact
citrus,
and
The Company is diligent in its efforts to identify
alternate suppliers, in its contingency planning for
potential supply shortages, and in its proactive
efforts to reduce costs through competitive bidding
practices. The Drilling Technologies and Artificial
Lift Technologies segments purchase raw materials
and steel on the open market
from numerous
suppliers. When able, the Company uses multiple
suppliers, both domestically and internationally, for
all raw materials purchases.
Technologies
Drilling Technologies maintains a three to six
month supply of mud-motor inventory parts sourced
from international and domestic suppliers, and
Drilling
Lift
Technologies maintain parts necessary to meet
forecast demand. The Company’s inventory levels
are maintained to accommodate the lead time
required to secure parts to avoid disruption of
service to customers.
Artificial
and
Government Regulations
The Company is subject to federal, state and local
environmental, occupational safety and health laws
and regulations within the U.S. and other countries
in which the Company does business. The
Company strives to ensure full compliance with all
regulatory requirements and is unaware of any
material instances of noncompliance. In the U.S.,
4
the Company must comply with laws and regulations
which include, among others:
‰
‰
‰
‰
the Comprehensive Environmental Response,
Compensation and Liability Act;
the Resource Conservation and Recovery Act;
the Federal Water Pollution Control Act; and
the Toxic Substances Control Act.
to quantify the
in
property
In addition to U.S. federal laws and regulations, the
Company does business in other countries which
have extensive environmental, legal, and regulatory
requirements. Laws and regulations strictly govern
the manufacture, storage, handling,
transportation,
use and sale of chemical products. The Company
evaluates the environmental impact of its actions and
remediating
attempts
contaminated
to maintain
compliance with regulatory requirements and identify
and avoid potential liability. Several products of the
Energy Chemicals Technologies’ and Consumer and
Industrial Chemical Technologies’
segments are
considered hazardous or flammable. In the event of a
leak or spill in association with Company operations,
the Company could be exposed to risk of material
to remediate any
cost, net of insurance proceeds,
contamination.
cost of
order
claims,
involved
is
litigation
occasionally
and
The Company
in
including
environmental
remediation of properties owned or operated. No
environmental litigation or claims are currently being
litigated. The Company does not expect that costs
related to known remediation requirements will have
an adverse effect on the Company’s consolidated
financial position or results of operations.
Employees
At December 31, 2013,
the Company had 487
employees, exclusive of existing worldwide agency
relationships. None of the Company’s employees are
covered by a collective bargaining agreement and
are generally positive. Certain
labor
international
or work
arrangements that are contingent upon local work
councils or other regulatory approvals.
locations
relations
staffing
have
Available Information and Website
is
accessible
Company’s website
The
at
www.flotekind.com. Annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act are available (see the “Investor
Relations” section of the Company’s website), as
soon as
to
electronically filing or otherwise providing reports to
the SEC. Corporate governance materials, guidelines,
by-laws, and code of business conduct and ethics are
also available on the website. A copy of corporate
governance materials
is available upon written
request to the Company.
reasonably practicable
subsequent
All material filed with the SEC’s “Public Reference
Room” at 100 F Street NE, Washington, DC 20549 is
available to be read or copied. Information regarding
the “Public Reference Room” can be obtained by
contacting the SEC at 1-800-SEC-0330. Further, the
SEC maintains the www.sec.gov website, which
contains reports and other registrant information filed
electronically with the SEC.
The
2013 Annual Chief Executive Officer
Certification required by the NYSE was submitted on
June 3, 2013. The certification was not qualified in
any respect. Additionally, the Company has filed all
principal executive officer and financial officer
certifications as required under Sections 302 and 906
of the Sarbanes-Oxley Act of 2002 with this Annual
Report. Information with respect to the Company’s
executive officers and directors is incorporated herein
by reference to information to be included in the
proxy statement for the Company’s 2014 Annual
Meeting of Stockholders.
any changes or
The Company has disclosed and will continue to
disclose
to the
Company’s code of business conduct and ethics as
well as waivers to the code of ethics applicable to
executive management by posting such changes or
waivers on the Company’s website.
amendments
Item 1A. Risk Factors.
The Company’s business, financial condition, results
of operations and cash flows are subject to various
risks and uncertainties,
including those described
below. These risks and uncertainties could cause
actual results to vary materially from current or
forecast results. The risks below are not all-inclusive
5
of risks that could impact the Company. Additional
risks not currently known to the Company or that
the Company presently considers immaterial could
impact the Company’s business operations.
profits,
strategic
uncertainties. Forward-looking
This Annual Report contains “forward-looking
statements,” as defined in the Private Securities
Litigation Reform Act of 1995, that involve risks
statements
and
discuss Company prospects, expected revenue,
and
expenses
operational
and other activity. Forward-looking
initiatives
regarding
statements also contain suppositions
future oil and natural gas industry conditions within
both domestic and international market economies.
The Company’s results could differ materially from
those anticipated in the forward-looking statements
as a result of a variety of factors, including risks
described below and elsewhere. See “Forward-
Looking Statements” at
this
Annual Report.
the beginning of
decline in the demand for, or negatively affect the
price of, some of
the Company’s products and
services. Domestic demand for oil and natural gas
could also be uniquely affected by public attitude
regarding drilling in environmentally sensitive areas,
vehicle emissions and other environmental standards,
alternative fuels, taxation of oil and gas, perception of
“excess profits” of oil and gas companies, and
anticipated changes in governmental regulation and
policy.
Demand for a significant number of Company
products and service is dependent on the level of
expenditures within the oil and natural gas
industry. If current global economic conditions
and the availability of credit worsen or oil and
natural gas prices weaken for an extended period
of
in levels of customers’
expenditures could have a significant adverse
effect on revenue, margins and overall operating
results.
reductions
time,
Risks Related to the Company’s Business
The Company’s business
is dependent upon
domestic and international oil and natural gas
industry spending. Spending could be adversely
affected by industry conditions or by new or
increased governmental regulations beyond the
Company’s control.
The Company is dependent upon customers’
willingness to make operating and capital expenditures
for exploration, development and production of oil and
natural gas in both the North American and global
markets. Customers’ expectations of a decline in
future oil and natural gas market prices could curtail
spending thereby reducing demand for the Company’s
products and services. Industry conditions in the U.S.
are influenced by numerous factors over which the
Company has no control, including the supply of and
demand for oil and natural gas, domestic and
international economic conditions, political instability
in oil and natural gas producing countries and merger
and divestiture activity among oil and natural gas
producers. The volatility of oil and natural gas prices
and the consequential effect on exploration and
production activity could adversely impact
the
Company’s customers’ activity levels. One indicator
of drilling and production spending is fluctuation in rig
count which the Company actively monitors to gauge
market conditions and forecast product and service
demand. A reduction in drilling activity could cause a
customers’
could impact
The global credit and economic environment could
impact worldwide demand for energy. Crude oil
and natural gas prices continue to be volatile. A
substantial or extended decline in oil or natural gas
prices
spending for
products and services. Demand for a significant
number of the Company’s products and services is
dependent upon the level of expenditures within the
oil and gas industry for exploration, development
and production of crude oil and natural gas
reserves. Expenditures are sensitive to oil and
natural gas prices, as well as the industry’s outlook
regarding future oil
and natural gas prices.
Increased competition could also exert downward
pressure on prices charged for Company products
and services. Limited price increases were available
to the Company in 2013. Volatile economic
conditions could weaken customer exploration and
production expenditures, causing reduced demand
and a
for Company products
significant
effect on the Company’s
operating results. It is difficult to predict the pace of
any industry growth, whether the economy will
worsen, and to what extent this could affect the
Company.
and services
adverse
Reduced cash flow and capital availability could
the financial condition of the
adversely impact
in
Company’s customers, which could result
or
project modifications,
customer
delays
6
cancellations, general business disruptions, and
delay in, or nonpayment of, amounts that are owed
to the Company. This could cause a negative impact
on the Company’s results of operations and cash
flows.
If certain of the Company’s suppliers were to
experience significant cash flow constraints or
become insolvent as a result of such conditions, a
reduction or interruption in supplies or a significant
increase in the price of supplies could occur, and
adversely
of
operations and cash flows.
the Company’s
impact
results
The price for oil and natural gas is subject to a
variety of factors, including:
•
•
•
•
•
•
•
•
•
•
demand for energy reactive to worldwide
population growth, economic development
and
business
economic
conditions;
general
and
the ability of the Organization of Petroleum
Exporting Countries (“OPEC”) to set and
maintain production levels;
production of oil and gas by non-OPEC
countries;
availability and quantity of natural gas
storage;
import volume and pricing of Liquefied
Natural Gas;
pipeline capacity to critical markets;
political and economic uncertainty and socio-
political unrest;
cost of exploration, production and transport
of oil and natural gas;
technological
consumption; and
advances
weather conditions.
impacting energy
The Company’s revolving credit facility and term
loan have variable interest
that could
increase.
rates
At December 31, 2013, the Company had a $75
million revolving credit facility commitment, of
which $16.3 million was drawn. The interest rate on
advances under the revolving credit facility varies
based on the level of borrowing. Rates range
(a) between PNC Bank’s base lending rate plus
base
lending
0.5% to 1.0% or (b) between the London Interbank
Offered Rate (LIBOR) plus 1.5% to 2.0%. PNC
Bank’s
3.25% at
December 31, 2013. The Company is required to
pay a monthly facility fee of 0.25% on any unused
amount under
the commitment based on daily
averages. The current credit facility remains in
effect until May 10, 2018.
rate was
The Company borrowed $50.0 million under the
term loan on May 10, 2013. The interest rate on the
term loan varies based on the level of borrowing
under the revolving credit facility. Rates range
(a) between PNC Bank’s base lending rate plus
1.25% to 1.75% or
(b) between the London
Interbank Lending Rate (LIBOR) plus 2.25% to
2.75%. PNC Bank’s base lending rate was 3.25% at
December 31, 2013.
There can be no assurance that the revolving credit
facility and the term loan will not experience
significant interest rate increases.
The Company’s May 2013 acquisition and
subsequent integration of the Florida Chemical
the
Company operations may adversely affect
Company’s business, results of operations, and
liquidity.
The Company acquired Florida Chemical Company
(“Florida Chemical”) on May 10, 2013. Whether
the Company realizes the anticipated benefits from
this acquisition depends, in part, upon its ability to
integrate the operations of the acquired business,
the performance of Florida Chemical’s underlying
the
product portfolio, and the performance of
management
the
team and other personnel of
acquired operations. Accordingly, the Company’s
financial results could be adversely affected from
unanticipated performance issues, legacy liabilities,
unanticipated
charges,
amortization of expenses related to intangibles and
charges for impairment of long-term assets. While
the Company believes
it has established
appropriate and adequate procedures and processes
to mitigate these risks, there is no assurance that
this transaction will ultimately be successful.
transaction-related
that
The Company’s migration of Florida Chemical to
its enterprise resource planning (“ERP”) system
may adversely affect the Company’s business and
results of operations or
the effectiveness of
internal control over financial reporting.
7
ERP
system.
existing
of business
Subsequent to the Florida Chemical acquisition, the
Company began the process of migrating Florida
Chemical’s inventory and accounting systems to the
ERP
Company’s
implementations are complex and time-consuming
projects that
involve substantial expenditures on
system software and implementation activities, and
and
also require
transformation
the
financial processes in order to fully exploit
benefits of the ERP system. Subsequent
to the
“in-service date” of the ERP system migration, the
Company may be required to continue to expend
material amounts of resources in order to maintain
the
specific
enhancements or modifications that are required as
a result of the Florida Chemical migration and to
experienced
train existing personnel or hire
personnel capable of using and maintaining the ERP
system. If the ERP system does not operate as
the financial
intended,
ability to
reporting systems,
produce financial reports, and/or the effectiveness
of internal control over financial reporting, and the
costs to remediate these deficiencies could be
material.
it could adversely affect
the Company’s
system and/or
existing
ERP
Network disruptions, security threats and activity
related to global cyber crime pose risks to our key
operational,
communication
systems.
reporting
and
of
its
for
operations. Failures
The Company relies on access to information
systems
or
interference with access to these systems, such as
network communications disruptions could have an
adverse effect on our ability to conduct operations
or directly impact consolidated reporting. Security
breaches pose a risk to confidential data and
intellectual property which could result in damages
to
reputation. The
company has policies and procedures in place,
including system monitoring and data back-up
processes, to prevent or mitigate the effects of these
potential disruptions or breaches, however there can
be no assurance that existing or emerging threats
will not have an adverse impact on our systems or
communications networks.
competitiveness
and
our
If the Company does not manage the potential
difficulties associated with expansion successfully,
be
the Company’s
adversely affected.
operating
results
could
The Company has grown over the last several years
through internal growth, strategic alliances, and, to
a lesser extent, strategic business/asset acquisitions.
The Company believes future success will depend,
in part, on the Company’s ability to adapt to market
opportunities and changes and to successfully
integrate the operations of any businesses acquired.
The following factors could result
in strategic
business difficulties:
•
•
•
•
•
lack of experienced management personnel;
increased administrative burdens;
lack of customer retention;
technological obsolescence; and
infrastructure, technological, communication
and logistical problems associated with large,
expansive operations.
fails
the Company
If
potential
difficulties successfully, including increased costs
associated with growth, the Company’s operating
results could be adversely impacted.
to manage
The Company’s ability to grow and compete could
be adversely affected if adequate capital is not
available.
The ability of the Company to grow and compete is
reliant on the availability of adequate capital.
Access to capital is dependent, in large part, on the
Company’s cash flows from operations and the
availability of equity and debt
financing. The
Company’s term and revolving loan agreements
with its bank also restricts the Company’s various
transactions or participation in various
capital
combinations. The
business
Company cannot guarantee
from
cash flows
operations will be sufficient, or that the Company
will continue to be able to obtain equity or debt
financing on acceptable terms, or at all, in order to
realize growth strategies. As a result, the Company
may not be able to finance strategic growth plans,
take advantage of business opportunities, or to
respond to competitive pressures.
acquisitions
and
The Company’s future success and profitability
may be adversely affected if the Company fails to
develop and/or introduce new and innovative
products and services.
The oil and natural gas drilling industry is
characterized by technological advancements that
likely
have historically resulted in, and will
8
continue to result in, substantial improvements in
the scope and quality of oilfield chemicals, drilling
and artificial lift products and services function and
performance. Consequently, the Company’s future
success is dependent, in part, upon the Company’s
continued ability to timely develop innovative
products and services. Increasingly sophisticated
customer needs and the ability to timely anticipate
and respond to technological and operational
advances in the oil and natural gas drilling industry
is critical. If the Company fails to successfully
develop and introduce innovative products and
services that appeal to customers, or if new market
entrants or competitors develop superior products
and
and
the Company’s
profitability could suffer.
services,
revenue
retail
cleaning
products,
Consumer and industrial chemical markets
that
purchase the Company’s citrus based products are
largely influenced by consumer preference and
regulatory requirements. While citrus based beverage
flavorings,
fine
fragrances perpetually rank high in consumer surveys,
the Company’s continued success
requires new
product innovation to keep pace with consumer trends
and regulatory issues. If the Company fails to provide
innovative products and services to its customers or to
introduce performance products that comply with new
environmental regulations, the Company’s financial
performance could be impacted.
and
The Company may pursue strategic acquisitions,
which could have an adverse impact on the
Company’s business.
that could adversely affect
The Company’s historical and potential acquisitions
involve risks
the
Company’s business. Negotiations of potential
acquisitions or
integration of newly acquired
businesses could divert management’s attention
from other business concerns as well as be cost
prohibitive and time consuming. Acquisitions could
also expose the Company to unforeseen liabilities
or risks associated with new markets or businesses.
difficulties
Unforeseen
to
operational
acquisitions could result
in diminished financial
performance or require a disproportionate amount
of
the Company’s management’s attention and
resources. Additional acquisitions could result in
the commitment of capital resources without the
realization of anticipated returns.
related
Unforeseen contingencies such as litigation could
adversely
financial
condition.
the Company’s
affect
to
hazardous
substances,
The Company is, and from time to time may
become, a party to legal proceedings incidental to
the Company’s business involving alleged injuries
arising from the use of Company products,
patent
exposure
infringement, employment matters, and commercial
disputes. The defense of these lawsuits may require
significant
management’s
attention, and may require the Company to pay
damages that could adversely affect the Company’s
financial condition. In addition, any insurance or
indemnification rights that the Company may have
may be insufficient or unavailable to protect against
potential loss exposures.
expenses,
divert
The Company’s current insurance policies may
not adequately protect
the Company’s business
from all potential risks.
as well
and the
environment,
The Company’s operations are subject
to risks
inherent in the oil and natural gas industry, such as,
but not limited to, accidents, blowouts, explosions,
fires, severe weather, oil and chemical spills, and
other hazards. These conditions can result
in
personal injury or loss of life, damage to property,
as
equipment
suspension of customers’ oil and gas operations.
Litigation arising from any catastrophic occurrence
where the Company’s equipment, products or
services are being used could result in the Company
being named as a defendant in lawsuits asserting
large claims. The Company maintains insurance
coverage it believes is adequate and customary to
the oil and natural gas industry to mitigate liabilities
associated with these potential hazards. The
Company does not have insurance against all
foreseeable risks, either because insurance is not
available or
is cost-prohibitive. Consequently,
losses and liabilities arising from uninsured or
underinsured events could have an adverse effect on
the Company’s business, financial condition, and
results of operations.
The Company is subject
to complex foreign,
federal, state and local environmental, health and
safety laws and regulations, which expose the
Company to liabilities that could adversely affect
the Company’s business, financial condition, and
results of operations.
9
The Company’s operations are subject to foreign,
federal, state, and local laws and regulations related
to, among other things, the protection of natural
resources, injury, health and safety considerations,
waste management, and transportation of waste and
other hazardous materials. The Energy Chemicals
Technologies segment exposes the company to risks
of environmental liability that could result in fines,
and
penalties,
personal
to remain
compliant with laws and regulations, the Company
maintains permits, authorizations and certificates as
required from regulatory authorities. Sanctions for
noncompliance with such laws and regulations
could include assessment of administrative, civil
and criminal penalties, revocation of permits, and
issuance of corrective action orders.
remediation, property damage,
injury liability.
In order
The Company could incur substantial costs to
ensure compliance with existing and future laws
and regulations. Laws protecting the environment
have generally become more stringent and are
expected to continue to evolve and become more
complex and restrictive into the future. Failure to
comply with applicable laws and regulations could
result in material expense associated with future
environmental compliance and remediation. The
Company’s costs of compliance could also increase
if existing laws and regulations are amended or
reinterpreted. Such amendments or reinterpretations
of existing laws or regulations, or the adoption of
new laws or regulations, could curtail exploratory
or developmental drilling for, and production of, oil
and natural gas which, in turn, could limit demand
for the Company’s products and services. Some
environmental
laws and regulations could also
impose joint and strict liability, meaning that the
Company could be exposed in certain situations to
increased liabilities as a result of the Company’s
conduct that was lawful at the time it occurred or
conduct of, or conditions caused by, prior operators
or other third parties. Remediation expense and
other damages arising as a result of such laws and
regulations could be substantial and have a material
adverse effect on the Company’s financial condition
and results of operations.
levels of
Material
the Company’s revenue are
derived from customers engaged in hydraulic
fracturing services, a process that creates fractures
extending from the well bore through the rock
formation to enable natural gas or oil to flow more
to
certain
disclose
publicly
easily through the rock pores to a production well.
Some states have adopted regulations which require
operators
non-
proprietary information. These regulations could
require the reporting and public disclosure of the
Company’s proprietary chemical
formulas. The
adoption of any future federal or state laws or local
requirements, or the implementation of regulations
imposing reporting obligations on, or otherwise
limiting,
the hydraulic fracturing process, could
increase the difficulty of oil and natural gas well
production activity and could have an adverse effect
on the Company’s future results of operations.
Regulation of greenhouse gases and/or climate
change could have a negative impact on the
Company’s business.
Certain scientific studies have suggested that
emissions of certain gases, commonly referred to as
“greenhouse gases,” which include carbon dioxide
and methane, may be contributory to the warming
effect of the Earth’s atmosphere and other climatic
changes. In response to such studies, the issue of
climate change and the effect of greenhouse gas
emissions, in particular emissions from fossil fuels,
is
attention.
Legislative and regulatory measures to address
greenhouse gas emissions have not yet been
finalized as of the date of this Annual Report but
remain impactive across international, national,
regional, and state levels.
increasing worldwide
attracting
change,
a negative
and climate
treaties, or
Existing or future laws, regulations,
related to greenhouse
international agreements
gases
including energy
conservation or alternative energy incentives, could
impact on the Company’s
have
operations, if regulations resulted in a reduction in
worldwide demand for oil and natural gas or global
economic activity. Other results could be increased
compliance
operating
restrictions, each of which would have a negative
impact on the Company’s operations.
additional
costs
and
Changes in regulatory compliance obligations of
impact our
critical
operations.
suppliers may adversely
The Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank Act”), signed into law
on July 21, 2010, includes Section 1502, which
requires the Securities and Exchange Commission
10
to
or
contracted
to adopt additional disclosure requirements related
to certain minerals sourced from the Democratic
Republic of Congo and surrounding countries, or
for which such conflict
“conflict minerals,”
minerals are necessary to the functionality of a
product manufactured,
be
manufactured, by an SEC-reporting company. The
metals covered by these rules, which were adopted
on August 22, 2012, include tin, tantalum, tungsten
and gold. The Company and Company suppliers
may use these materials
in their production
processes. In order to be able to accurately report
the Company’s compliance with Section 1502, the
Company will have to perform supply chain due
diligence,
third-party verification, and possibly
private sector audits on the sources of these metals
all the way down to the mine of origin. Global
supply chains are complicated, with multiple layers
and suppliers between the mine and the final
product. Accordingly,
likely
incur significant cost related to the compliance
process. While the impact of Section 1502 on the
this time,
Company’s business is uncertain at
difficulty could potentially occur
in procuring
needed materials from conflict-free sources and in
satisfying the associated disclosure requirements.
the Company will
If the Company is unable to adequately protect
intellectual property rights or is found to infringe
upon the intellectual property rights of others, the
Company’s business is likely to be adversely
affected.
prevent misappropriation
The Company relies on a combination of patents,
trademarks, non-disclosure agreements, and other
security measures to establish and protect
the
Company’s intellectual property rights. Although
the Company believes that existing measures are
reasonably adequate to protect intellectual property
rights, there is no assurance that the measures taken
will
proprietary
information or dissuade others from independent
development of
services.
Moreover, there is no assurance that the Company
will be able to prevent competitors from copying,
reverse engineering, or otherwise obtaining and/or
using the Company’s technology and proprietary
rights for products. The Company may not be able
to enforce intellectual property rights outside of the
U.S. Furthermore, the laws of certain countries in
which the Company’s products and services are
the
manufactured or marketed may not protect
similar products or
of
Company’s proprietary rights to the same extent as
do the laws of
the U.S. Finally, parties may
challenge, invalidate, or circumvent the Company’s
patents, trademarks, copyrights and trade secrets. In
each case, the Company’s ability to compete could
be significantly impaired.
A portion of the Company’s products are without
patent protection. The issuance of a patent does not
guarantee validity or enforceability. Company
patents may not be valid or enforceable against
third parties. The issuance of a patent does not
guarantee that the Company has the right to use the
patented invention. Third parties may have blocking
patents that could be used to prevent the Company
from marketing the Company’s own patented
products and utilizing our patented technology.
The Company is exposed to allegations of patent and
other intellectual property infringement. Furthermore,
the Company could become involved in costly
litigation or proceedings regarding patents or other
intellectual property rights. If any such claims are
asserted against the Company, the Company could
seek to obtain a license under the third party’s
to mitigate
intellectual property rights in order
exposure. In the event the Company cannot obtain a
license, affected parties could file lawsuits against the
Company seeking damages (including treble damages)
or an injunction against the sale of the Company’s
products. These could result in the Company having to
discontinue the sale of certain products, increase the
cost of selling products, or result in damage to the
reputation. The award of damages,
Company’s
including material royalty payments, or the entry of an
injunction order against the manufacture and sale of
any of the Company’s products, could have an adverse
effect on the Company’s results of operations and
ability to compete.
The Company and the Company’s customers are
subject
to risks associated with doing business
outside of the U.S., including political risk, foreign
exchange risk and other uncertainties.
Revenue from the sale of products to customers
outside the U.S. was approximately 13.9% of the
Company’s 2013 annual revenue. The Company
and its customers are subject to risks inherent in
doing business outside of the U.S., including:
•
•
governmental instability;
corruption;
11
•
•
•
•
•
•
war and other international conflicts;
civil and labor disturbances;
requirements of local ownership;
partial or total expropriation or nationalization;
currency devaluation; and
foreign laws and policies, each of which can
limit
the movement of assets or funds or
result in the deprivation of contractual rights
fair
or appropriation of property without
compensation.
rental
Collections and recovery of
tools from
international customers and agents could also prove
difficult due to inherent uncertainties in foreign law
and judicial procedures. The Company could
experience significant difficulty with collections or
recovery due to the political or judicial climate in
foreign countries where Company operations occur
or in which the Company’s products are used.
as
laws
increased
The Company’s international operations must be
compliant with the Foreign Corrupt Practices Act
(the “FCPA”) and other applicable U.S. laws. The
Company could become liable under these laws for
actions taken by employees or agents. Compliance
laws and regulations could
with international
become more complex and expensive thereby
creating
the Company’s
risk
international business portfolio grows. Further, the
imposes
and
enacts
periodically
U.S.
regulations prohibiting or
restricting trade with
certain nations. The U.S. government could also
change these laws or enact new laws that could
the Company from doing
restrict or prohibit
business in identified foreign countries. Although
most of the Company’s international revenue is
derived from transactions denominated in U.S.
the Company has conducted, and may
dollars,
continue to conduct some business in currencies
other than the U.S. dollar. The Company currently
currency
does
against
Company’s
Accordingly,
fluctuations.
profitability could be affected by fluctuations in
foreign exchange rates.
foreign
the
hedge
not
The Company has no control over, and can provide
no assurances that future laws and regulations will
not materially impact
the Company’s ability to
conduct international business.
The loss of key customers could have an adverse
impact on the Company’s results of operations and
could result
in a decline in the Company’s
revenue.
are
upon
dependent
production
The Company has critical customer relationships
which
and
development activity related to a handful of
customers. Revenue derived from key customers as
a percentage of consolidated revenue for the years
ended December 31, 2013, 2012 and 2011, totaled
30%, 35%, and 28% ,
respectively. Customer
relationships are historically governed by purchase
orders or other short-term contractual obligations as
opposed to long-term contracts. The loss of one or
more key customers could have an adverse effect on
the Company’s results of operations and could
result in a decline in the Company’s revenue.
Loss of key suppliers, the inability to secure raw
materials on a timely basis, or the Company’s
inability to pass commodity price increases on to
customers could have an adverse effect on the
Company’s ability to service customer’s needs and
could result in a loss of customers.
sources.
Acquisition
raw materials
Materials used in servicing and manufacturing
operations as well as those purchased for sale are
from
generally available on the open market
and
costs
multiple
transportation of
to Chemical’s
facilities have historically been impacted by
extreme weather conditions. Certain raw materials
used by the Energy Chemicals Technologies
segment are available only from limited sources;
accordingly, any disruptions to critical suppliers’
operations could adversely impact the Company’s
operations. Prices paid for raw materials could be
affected by energy, steel and other commodity
prices;
tariffs and duties on imported materials;
foreign currency exchange rates; phases of the
general business cycle and global demand. The
Lift
Drilling
Technologies
raw
materials on the open market and, where able, from
multiple
and
both
internationally.
Technologies
segments
Artificial
critical
and
purchase
domestically
suppliers,
The Company maintains a three-
to six-month
supply of critical mud-motor inventory parts that
the Company sources from China. This inventory
stock position approximates the lead time required
12
to
the Company’s
to secure these parts in order to avoid disruption of
service
customers. The
Company’s inability to secure reasonably priced
critical inventory parts in a timely manner would
adversely affect the Company’s ability to provide
service to potential customers. The Company
sources the vast majority of motor parts from a
national supplier. As part of the 2014 business plan,
the Company is actively managing and developing
relationships with back-up parts
and service
suppliers.
The Company currently does not hedge commodity
prices. The Company may be unable to pass along
price increases to its customers, which could result
in a decline in revenue or operating profits.
The Company’s inability to develop new products
or differentiate existing products could have an
adverse effect on its ability to be responsive to
customer’s needs and could result in a loss of
customers.
The Company’s ability to compete within the
oilfield services business is dependent upon the
ability to differentiate products and services,
provide superior quality and service, and maintain a
competitive cost structure. Activity levels in the
Company’s operations are driven by current and
forecast commodity prices, drilling rig count, oil
and natural gas production levels, and customer
capital spending for drilling and production. The
regions in which the Company operates are highly
competitive. The Company is also smaller than
many other oil and natural gas service companies
and has fewer resources as compared to these
competitors. The large competitors may be better
downturns,
positioned
compete on the basis of price, and acquire new
equipment and technologies, all of which could
affect the Company’s revenue and profitability. The
and
Company competes
acquisition
could
the Company’s operating profit.
adversely affect
The Company believes
competition for
products and services will continue to be intense
into the foreseeable future.
opportunities. Competition
for both customers
to withstand
industry
that
If the Company loses the services of key members
of management, the Company may not be able to
growth
and
manage
strategies.
implement
operations
of
The Company depends on the continued service of
the Chief Executive Officer and President, the Chief
Financial Officer,
the Executive Vice President,
Operations, Executive Vice President, Business
Development and Marketing and Executive Vice
President, Research & Development
the
Company and President of Florida Chemical
Company Inc, who possess significant expertise and
knowledge of the Company’s business and industry.
Furthermore,
the Chief Executive Officer and
President serves as Chairman of the Board of
Directors. The Company
into
these key
employment agreements with all of
members; however, at December 31, 2013 the
Company did not carry key man life insurance on
all executives. Any loss or interruption of the
the Company’s
services of key members of
management
the
reduce
Company’s ability to manage operations effectively
and implement strategic business initiatives. The
Company can provide no assurance that appropriate
replacements for key positions could be found
should the need arise.
significantly
entered
could
has
If a new stock-based incentive plan is not
approved by shareholders, the Company may lose
key members of its senior management team and
may not be able to attract adequate replacements.
There may be an insufficient number of shares
remaining under previously approved long term
incentive plans to provide for competitive long term
incentive awards for the Company’s key senior
management. If shareholder’s do not approve a new
long term incentive plan in 2014, the Company
could lose key members of its senior management
team and may not be able to attract adequate
replacements.
Failure to maintain effective disclosure controls
and procedures and internal
controls over
financial reporting could have an adverse effect
on the Company’s operations and the trading price
of the Company’s common stock.
Effective internal controls are necessary for the
reports,
Company to provide reliable financial
effectively prevent fraud and operate successfully
the Company cannot
as a public company.
If
provide reliable financial
reports or effectively
reputation and
the Company’s
fraud,
prevent
operating results could be harmed. If the Company
13
is unable to maintain effective disclosure controls
and procedures and internal controls over financial
reporting, the Company may not be able to provide
reliable financial reports, which in turn could affect
the Company’s operating results or cause the
Company to fail to meet its reporting obligations.
Ineffective internal controls could also cause
investors to lose confidence in reported financial
the
information, which could negatively affect
trading price of the Company’s common stock,
limit the ability of the Company to access capital
markets in the future, and require additional costs to
improve internal control systems and procedures.
Risks Related to the Company’s Industry
General economic declines (recessions) and limits
to credit availability could have an adverse effect
on exploration and production activity and result
in lower demand for the Company’s products and
services.
of
and
financial
industrial
Continued worldwide
credit
uncertainty can reduce the availability of liquidity
and credit markets to fund the continuation and
operations
expansion
worldwide. The shortage of liquidity and credit
combined with pressure on worldwide equity
markets could continue to impact the worldwide
economic climate. Unrest in the Middle East may
also impact demand for the Company’s products
and services both domestically and internationally.
business
Demand for the Company’s products and services is
dependent on oil and natural gas industry activity
and expenditure levels that are directly affected by
trends in oil and natural gas prices. Demand for the
Company’s products and services is particularly
sensitive to levels of exploration, development, and
production activity of, and the corresponding
capital spending by, oil and natural gas companies,
including national oil companies. One indication of
drilling and production activity and spending is rig
count, which the Company monitors to gauge
market conditions. Any prolonged reduction in oil
and natural gas prices or drop in rig count could
depress current levels of exploration, development,
and production activity. Perceptions of longer-term
lower oil and natural gas prices by oil and natural
gas companies could similarly reduce or defer
major expenditures given the long-term nature of
many large-scale development projects. Lower
levels of activity could result in a corresponding
decline in the demand for the Company’s oil and
natural gas well products and services, which could
have a material adverse effect on the Company’s
revenue and profitability.
The Company’s consumer and industrial customers
would be adversely effected if economic activity
decreased dramatically. The Company’s primary
is often used to replace less desirable
product
solvents
in numerous consumer and industrial
applications and is more expensive than other
decreases,
materials. As
companies not only
consumer
consume less solvent,
they also may relax their
environmental mandates and purchase cheaper
solvents. The Company’s revenue and profitability
could be negatively impacted if demand softens
because of weak economic activity.
economic
and industrial
activity
and
economic
customers
for many of
Events in global credit markets can significantly
the availability of credit and associated
impact
financing costs
the Company’s
customers. Many of
the Company’s customers
finance their drilling and production programs
through third-party lenders or public debt offerings.
increased costs of
Lack of available credit or
to reduce
borrowing could cause
spending on drilling programs,
thereby reducing
demand and potentially resulting in lower prices for
the
the Company’s products and services. Also,
credit
could
significantly impact the financial condition of some
leading to
customers over a prolonged period,
business disruptions and restricted ability to pay for
the Company’s
services. The
Company’s forward-looking statements assume that
the Company’s lenders, insurers, and other financial
institutions will be able to fulfill their obligations
under various credit agreements, insurance policies,
and contracts. If any of the Company’s significant
lenders, insurers and others are unable to perform
under such agreements, and if the Company was
unable to find suitable replacements at a reasonable
cost, the Company’s results of operations, liquidity,
and cash flows could be adversely impacted.
environment
products
and
A prolonged period of depressed oil and natural
gas prices could result in reduced demand for the
Company’s products and services and adversely
financial
the Company’s
affect
condition, and results of operations.
business,
14
The markets for oil and natural gas have historically
been volatile. Such volatility in oil and natural gas
prices, or
the perception by the Company’s
customers of unpredictability in oil and natural gas
prices, could adversely affect spending. The oil and
natural gas markets may be volatile in the future.
The demand for
the Company’s products and
services is, in large part, driven by general levels of
exploration and production spending and drilling
activity by its customers. Decrease in oil and
natural gas prices could cause a decline in
exploration and drilling activities. This,
in turn,
could result in lower demand for the Company’s
products and services and could result
in lower
prices for the Company’s products and services. A
prolonged decline in oil or natural gas prices could
adversely affect the Company’s business, financial
condition, and results of operations.
existing
New and
the
Company’s industries could have an adverse effect
on results of operations.
competitors within
resources
than does
substantially
and natural gas
that
and other
The oil
industry is highly
competitive. The Company’s principal competitors
include numerous small companies capable of
competing effectively in the Company’s markets on
large
a local basis, as well as a number of
companies
greater
possess
the
financial
Company. Larger competitors may be able to
devote greater resources to developing, promoting
and selling products and services. The Company
may also face increased competition due to the
entry
current
new competitors
including
suppliers that decide to sell
their products and
services directly to the Company’s customers. As a
the Company could
result of
experience lower sales or greater operating costs,
which could have an adverse effect on the
Company’s margins and results of operations.
this competition,
of
Regulatory pressures, environmental activism, and
legislation could result in reduced demand for the
Company’s products and services and adversely
affect
financial
the Company’s
condition, and results of operations.
business,
Regulations restricting volatile organic compounds
(VOCs) exist in many states and/or communities
which limit demand for certain products. Although
citrus oil is considered a VOC, its health, safety,
15
and environmental profile is preferred over other
solvents (e.g., BTEX), which is currently creating
new market opportunities
around the world.
Changes in the perception of citrus oils as a
preferred VOC,
activism
against hydraulic fracturing or other regulatory or
legislative actions by governments could potentially
result
the
and could
Company’s products
adversely affect the Company’s business, financial
condition, and results of operations.
in materially reduced demand for
increased consumer
and services
The Company’s industry has a high rate of
employee
or
retaining personnel or agents could adversely
affect the Company’s business.
turnover. Difficulty
attracting
The Company operates in an industry that has
historically been highly competitive in securing
qualified personnel with the required technical
skills and experience. The Company’s services
require skilled personnel able to perform physically
demanding work. Due to industry volatility and the
demanding nature of
the work, workers could
choose to pursue employment opportunities that
offer a more desirable work environment at wages
competitive with the Company’s. As a result, the
Company may not be able to find qualified labor,
which could limit
In
the cost of attracting and retaining
addition,
qualified personnel has increased over the past
several years due to competitive pressures. The
Company expects labor costs will continue to
increase into the foreseeable future. In order to
attract and retain qualified personnel, the Company
may be required to offer increased wages and
benefits. If the Company is unable to increase the
prices of products and services to compensate for
increases in compensation, or is unable to attract
and retain qualified personnel, operating results
could be adversely affected.
the Company’s growth.
Severe weather could have an adverse impact on
the Company’s business.
The Company’s business could be materially and
adversely affected by severe weather conditions.
Hurricanes, tropical storms, flash floods, blizzards,
cold weather and other severe weather conditions
could result in curtailment of services, damage to
in
facilities,
equipment
transportation of products and materials, and loss of
interruption
and
If
productivity.
the Company’s customers are
unable to operate or are required to reduce
operations due to severe weather conditions, and as
the Company’s
a result curtail purchases of
products and services,
the Company’s business
could be adversely affected.
A terrorist attack or armed conflict could harm the
Company’s business.
if
pipelines,
production
Terrorist activities, anti-terrorist efforts, and other
armed conflicts involving the U.S. could adversely
affect the U.S. and global economies and could
prevent the Company from meeting financial and
other obligations. The Company could experience
loss of business, delays or defaults in payments
from payors, or disruptions of fuel supplies and
facilities,
markets
processing plants, or refineries are direct targets or
indirect casualties of an act of terror or war. Such
activities could reduce the overall demand for oil
and natural gas which, in turn, could also reduce the
demand for the Company’s products and services.
Terrorist activities and the threat of potential
terrorist activities and any resulting economic
the Company’s
downturn could adversely affect
impair the ability to raise
results of operations,
capital,
the
or
Company’s ability to realize certain business
strategies.
otherwise
adversely
impact
Risks Related to the Company’s Securities
The market price of the Company’s common stock
has been and may continue to be volatile.
historically
The market price of the Company’s common stock
has
significant
fluctuations. The following factors, among others,
could cause the price of the Company’s common
stock to fluctuate significantly:
subject
been
to
•
•
•
•
•
•
•
variations in the Company’s quarterly results
of operations;
changes in market valuations of companies in
the Company’s industry;
fluctuations in stock market prices and volume;
fluctuations in oil and natural gas prices;
issuances of common stock or other securities
in the future;
additions or departures of key personnel; and
the
announcements by the Company or
Company’s competitors of new business,
acquisitions, or joint ventures.
16
The stock market has experienced unusual price and
volume fluctuations in recent years that have
significantly affected the price of common stock of
companies within many industries including the oil
and natural gas industry. Further changes can occur
without regard to specific operating performance.
The price of the Company’s common stock could
fluctuate based upon factors that have little to do
with the Company’s operational performance, and
these fluctuations could materially reduce the
Company’s stock price. The Company could be a
defendant in a legal case related to a significant loss
the shareholders. This could be
of value for
expensive and divert management’s attention and
Company resources, as well as have an adverse
effect on the Company’s business,
financial
condition, and results of operations.
An active market for the Company’s common
stock may not continue to exist or may not
continue to exist at current trading levels.
Trading volume for the Company’s common stock
historically has been very volatile when compared
to companies with larger market capitalizations.
The Company cannot presume that an active trading
market
the Company’s common stock will
continue or be sustained. Sales of a significant
number of shares of the Company’s common stock
in the public market could lower the market price of
the Company’s stock.
for
The Company has no plans to pay dividends on the
therefore,
Company’s
investors will have to look to stock appreciation for
return on investments.
common
stock,
and,
and growth of
The Company does not anticipate paying any cash
dividends on the Company’s common stock within
the foreseeable future. The Company currently
intends to retain all future earnings to fund the
development
the Company’s
business and to meet current debt obligations. Any
payment of future dividends will be at the discretion
of
the Company’s board of directors and will
depend, among other things, on the Company’s
earnings, financial condition, capital requirements,
level of
indebtedness, statutory and contractual
restrictions applying to the payment of dividends,
and other considerations deemed relevant by the
should the
board of directors. Additionally,
Company seek future financing or refinancing of
indebtedness, covenants could restrict the payment
of dividends without the prior written consent of
lenders. Investors must rely on sales of common
stock held after price appreciation, which may
never occur, in order to realize a return on their
investment.
Certain anti-takeover provisions of the Company’s
charter documents and applicable Delaware law
could discourage or prevent others from acquiring
the Company, which may adversely affect
the
market price of the Company’s common stock.
The Company’s certificate of incorporation and
bylaws contain provisions that:
•
•
•
•
•
permit
the Company to issue, without
stockholder approval, up to 100,000 shares of
preferred stock, in one or more series and,
with respect
to fix the
to each series,
designation, powers, preferences and rights of
the shares of the series;
prohibit stockholders from calling special
meetings;
limit
written consent;
prohibit cumulative voting; and
require
stockholder
for
notice
proposals and nominations for election to the
board of directors
to be acted upon at
meetings of stockholders.
the ability of stockholders to act by
advance
provisions
and other
In addition, Section 203 of the Delaware General
Corporation Law limits business combinations with
owners of more than 15% of the Company’s stock
the approval of the board of directors.
without
Aforementioned
similar
provisions make it more difficult for a third party to
acquire the Company exclusive of negotiation. The
Company’s board of directors could choose not to
negotiate with an acquirer deemed not beneficial to
or
strategic
outlook.
If an acquirer were discouraged from
offering to acquire the Company or prevented from
successfully completing a hostile acquisition by
these anti-takeover measures, stockholders could
lose the opportunity to sell
their shares at a
favorable price.
synergistic with the Company’s
Future issuance of additional shares of common
stock could cause dilution of ownership interests
and adversely affect the Company’s stock price.
The Company may, in the future, issue previously
authorized and unissued shares of common stock,
17
right
conversion
which would result
in the dilution of current
stockholders ownership interests. The Company is
currently authorized to issue 80,000,000 shares of
to
common stock. Additional shares are subject
issuance through various equity compensation plans
or through the exercise of currently outstanding
options. The potential issuance of additional shares
of common stock, whether directly or pursuant to
any
any
convertible securities of the Company, or through
exercise of outstanding warrants may create
downward pressure on the trading price of the
Company’s common stock. The Company may also
issue additional shares of common stock or other
securities that are convertible into or exercisable for
common stock in order to raise capital or effectuate
other business purposes. Future sales of substantial
amounts of common stock, or the perception that
sales could occur, could have an adverse effect on
the price of the Company’s common stock.
associated with
On February 7, 2014, all remaining warrants were
exercised.
The Company may issue shares of preferred stock
or debt securities with greater rights than the
Company’s common stock.
Subject to the rules of the NYSE, the Company’s
certificate of incorporation authorizes the board of
directors to issue one or more additional series of
preferred stock and to set the terms of the issuance
without seeking approval from holders of common
stock. Currently, there are 100,000 preferred shares
authorized, with no shares currently outstanding.
Any preferred stock that is issued may rank senior
to common stock in terms of dividends, priority and
liquidation premiums, and may have greater voting
rights than holders of common stock.
The Company’s ability to use net operating loss
carryforwards and tax attribute carryforwards to
offset future taxable income may be limited as a
result of transactions involving the Company’s
common stock.
Under section 382 of the Internal Revenue Code of
1986, as amended, a corporation that undergoes an
“ownership change” is subject to limitations on the
Company’s
ability to utilize pre-change net
operating losses (“NOLs”), and certain other tax
In
attributes
the
general,
to offset
an ownership change occurs
future taxable income.
if
“ownership
taxable years
for
identified
aggregate stock ownership of certain stockholders
increases by more than 50 percentage points over
such stockholders’
lowest percentage ownership
during the testing period (generally three years). An
ownership change could limit
the Company’s
ability to utilize existing NOLs and tax attribute
including or
carryforwards
following
change.”
an
Transactions involving the Company’s common
stock, even those outside the Company’s control,
such as purchases or sales by investors, within the
testing period, could result
in an “ownership
change.” Limitations imposed on the ability to use
NOLs and tax credits to offset
future taxable
income could require the Company to pay U.S.
federal income taxes in excess of that which would
otherwise be required if such limitations were not in
effect. Net operating losses and tax attributes could
in each instance reducing or
expire unused,
eliminating the benefit of
the NOLs and tax
attributes. Similar rules and limitations may apply
for state income tax purposes.
Disclaimer of Obligation to Update
no
assumes
obligation
Except as required by applicable law or regulation,
(and
the Company
specifically disclaims any such obligation)
to
update these risk factors or any other forward-
looking statement contained in this Annual Report
to reflect actual results, changes in assumptions or
other
forward-looking
statements.
affecting
factors
such
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Properties.
As of January 31, 2014, the Company operated 29
manufacturing and warehouse facilities in nine U.S.
states. The Company owns 14 of these facilities
with the remainder being leased with lease terms
that expire from 2014 through 2031. In addition,
our corporate office is a leased facility located in
Houston, Texas. The following table sets forth
facility locations:
Segment
Owned/Leased
Location
Energy
Chemical
Technologies
Drilling
Technologies
Owned
Owned
Owned
Leased
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Marlow, Oklahoma
Carthage, Texas
Wheeler, Texas
Raceland, Louisiana
The Woodlands,
Texas
Waller, Texas
Healdton, Oklahoma
Oklahoma City,
Oklahoma
Houston, Texas
Midland, Texas
Robstown, Texas
Vernal, Utah
Evanston, Wyoming
Bossier City,
Louisiana
New Iberia,
Louisiana
Pocola, Oklahoma
Grand Prairie, Texas
Houston, Texas
Midland, Texas
Odessa, Texas
Pittsburgh,
Pennsylvania
Wysox,
Pennsylvania
Woodward,
Oklahoma
Casper, Wyoming
Artificial Lift
Technologies
Owned
Gillette, Wyoming
Owned
Leased
Leased
Dickinson,
North Dakota
Farmington,
New Mexico
Gillette, Wyoming
Consumer
and
Industrial
Chemical
Technologies
Owned
Winter Haven,
Florida
The Company considers owned and leased facilities
to be in good condition and suitable for the conduct
of business.
18
Item 3.
Legal Proceedings.
to have a material effect on the Company’s financial
position, results of operations or liquidity.
The Company is subject
to routine litigation and
other claims that arise in the normal course of
business. Management is not aware of any pending or
threatened lawsuits or proceedings that are expected
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
The Company’s common stock began trading on the
NYSE on December 27, 2007 under the stock ticker
symbol “FTK.” As of the close of business on
January 31, 2014, there were 51,899,901 shares of
common stock outstanding held by approximately
14,000 holders of record. The Company’s closing
sale price of the common stock on the NYSE on
January 31, 2014 was $21.51. The Company has
never declared or paid cash dividends on common
stock. While the Company regularly assesses the
dividend policy, the Company has no current plans to
declare dividends on common stock, and intends to
continue to use earnings and other cash in the
maintenance and expansion of the business. Further,
the Company’s Credit Facility contains provisions
that limit its ability to pay cash dividends on its
common stock.
The following table sets forth, on a per share basis for the periods indicated, the high and low closing sales prices
of common stock as reported by the NYSE. These prices do not include retail mark-ups, mark-downs or
commissions.
2013
2012
Fiscal quarter ended:
March 31,
June 30,
September 30,
December 31,
High
$16.35
$18.00
$23.08
$23.46
Low
$12.54
$14.57
$17.85
$19.01
High
$13.03
$14.20
$12.99
$13.15
Low
$10.28
$8.68
$9.01
$10.01
19
Stock Performance Graph
The performance graph below illustrates a five year
comparison of cumulative total returns based on an
initial investment of $100 in the Company’s common
stock, as compared with the Russell 2000 Index and
the Philadelphia Oil Services Index for the period
2008 through 2013. The performance graph assumes
$100 invested on December 31, 2008 in each of the
Company’s common stock, the Russell 2000 Index
and the Philadelphia Oil Service Index, and that all
dividends were reinvested.
The succeeding graph should not be deemed to be
filed as part of
this Annual Report, does not
constitute soliciting material and should not be
deemed filed or incorporated by reference into any
other filing of the Company under the Securities Act
of 1933, as amended, or the Exchange Act, as
the Company
to the
amended,
specifically incorporates the graph by reference.
except
extent
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 31,
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
2008
Flotek Industries, Inc.
2009
2010
Russell 2000 Index
2011
2013
Philadelphia Oil Service Index (OSX)
2012
Flotek Industries, Inc.
Russell 2000 Index
Philadelphia Oil Service Index (OSX)
2008
$100
$100
$100
2009
$53
$125
$161
December 31,
2010
$216
$157
$202
2011
$395
$148
$178
2012
$484
$215
$181
2013
$796
$233
$232
20
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes equity compensation plan information regarding equity securities authorized for
issuance under individual stock option compensation agreements:
Plan category
Number of Securities to be
Issued Upon Exercise of
Outstanding Options, Warrants
and Rights
Weighted-Average Exercise
Price of Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in the Column(a))
(a)
(b)
(c)
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
3,107,273
—
3,107,273
$8.28
—
$8.28
298,486
—
298,486
Issuer Purchases of Equity Securities
In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million of the
Company’s common stock. Repurchases may be made in open market or privately negotiated transactions.
Through December 31, 2013, the Company has not repurchased any of its common stock under this repurchase
program and $25 million may yet be used to purchase shares.
Total Number
Of Shares
Purchased
Average Price
Paid Per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Dollar Value
of Shares that May Yet be
Purchased Under the
Plans or Programs
October 1 to
October 31, 2013
November 1 to
20,378
$22.58
November 30, 2013
1,696
$21.17
December 1 to
December 31, 2013
Total
134,184
156,258
$20.04
$20.38
—
—
—
—
$25,000,000
$25,000,000
$25,000,000
$25,000,000
21
Item 6.
Selected Financial Data.
The following table sets
forth certain selected
historical
financial data and should be read in
II, Item 7. “Management’s
conjunction with Part
Discussion and Analysis of Financial Condition and
Results of Operations” and Part II, Item 8. “Financial
Statements and Supplementary Data,” which are
included elsewhere within this Annual Report. The
selected operating and financial position data as of
and for each of the five years presented have been
derived
consolidated Company
financial statements, some of which appear elsewhere
in this Annual Report.
from audited
During the annual period 2013,
the Company
acquired Florida Chemical Company, Inc for the total
purchase
$106 million. The
incurred significant non-recurring
Company has
consideration
of
charges during the annual periods 2012 through
2009. During the annual period 2012, the Company
recorded a reduction in the valuation allowance for
deferred tax assets of $16.5 million. Additionally,
during the annual periods 2012 and 2011,
the
Company incurred losses on the extinguishment of
debt of $7.3 million and $3.2 million, respectively.
During the annual period 2010,
the Company
recorded fixed asset and other intangible impairment
charges totaling $9.3 million. Additionally, during
the annual period 2010 the Company incurred losses
on the extinguishment of debt of approximately $1.0
million and other financing charges of $0.8 million.
During the annual period 2009,
the Company
recorded impairment charges for goodwill and other
intangible assets of $18.5 million.
2013
As of and for the Year ended December 31,
2011
(in thousands, except per share data)
2012
2010
2009
Operating Data
Revenue
Income (loss) from operations
Net income (loss)
Earnings (loss) per share – Basic
Earnings (loss) per share – Diluted
Financial Position Data
Total assets
Convertible senior notes, long-term
debt and capital lease obligations,
less discount and current portion
Stockholders’ equity
$ 371,065
58,726
36,178
0.70
0.67
$
$
$ 312,828
58,621
49,791
1.03
0.97
$
$
$ 258,785
48,888
31,408
0.60
0.56
$
$
$ 146,982
(6,267)
(43,465)
$
$
(1.94) $
(1.94) $
$ 112,550
(33,103)
(50,333)
(2.68)
(2.68)
$ 375,581
$ 219,867
$ 232,012
$ 184,807
$ 178,901
35,690
249,752
22,455
154,730
100,613
78,298
126,682
(3,453)
119,190
27,196
22
Item 7. Management’s Discussion and Analysis
of
of
Operations.
Financial Condition
and Results
and
the
Financial
related Notes
Statements
The following discussion and analysis should be
read in conjunction with the Consolidated Financial
to
Statements
the
Consolidated
included
elsewhere in this Annual Report on Form 10-K
(“Annual Report”). The following information
contains forward-looking statements, which are
subject to risks and uncertainties. Should one or
more of these risks or uncertainties materialize,
actual results could differ from those expressed or
implied by the forward-looking statements. See
“Forward-Looking Statements” at the beginning of
this Annual Report.
Executive Summary
Flotek is a global diversified,
technology-driven
and supplies oilfield
company that develops
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.
and
loading
facilities
logistics,
chemicals
businesses
efficiently,
include
oilfield
The Company’s
down-hole
and
specialty
drilling tools and down-hole production-related
tools. Flotek’s technologies enable customers to
drill wells more
increase well
production and decrease well operating costs. The
Company also provides automated bulk material
handling,
blending
capabilities. Through its acquisition of Florida
Chemical in May 2013, the Company 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
and
the
(2) environmentally friendly chemicals for use in
numerous industries around the world, specifically
the oil and gas (“O&G”) industry. The Company
has combined the research efforts of the newly
acquired business with its previously existing
research and development
to
strengthen its focus on developing environmentally
responsible products for the oil and gas industry and
other markets.
fragrances markets
(“R&D”) effort
flavors
and
20
operates
domestic
over
and
Flotek
in
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
include major
and Asia-Pacific. Customers
integrated O&G companies,
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
users,
non-energy-related
cleaning
including household and commercial
product
cosmetic
and
companies, and food manufacturing companies.
companies,
fragrance
oilfield
citrus
oil
reportable
The operations of the Company are categorized into
four
segments: Energy Chemical
Technologies, Consumer and Industrial Chemical
Technologies, Drilling Technologies and Artificial
Lift Technologies.
completion,
Technologies
designs,
Energy Chemical
develops, manufactures, packages and markets
specialty chemicals used in O&G well drilling,
cementing,
and
production. Activities in this segment also
construction and management of
include
automated material handling facilities and
management of loading facilities and blending
operations for oilfield services companies.
stimulation
Consumer and Industrial Chemical Technologies
designs, develops and manufactures products
that are sold to companies in the flavor and
fragrance industries and specialty chemical
are used by
technologies
industry. These
beverage
fragrance
food
companies, and companies providing household
and industrial cleaning products.
companies,
and
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,
separators,
electric submersible pumps, gas
valves and services that support natural gas, oil
and coal bed methane production activities.
‰
‰
‰
‰
23
Market Conditions
The Company’s success is sensitive to a number of
factors, which include, but are not limited to, drilling
advanced
demand
activity,
technology products, market prices for raw materials
and governmental actions.
customer
for
its
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.
TABLE A
Average North American Active Drilling Rigs
United States
Canada
Total
Average U.S. Active Drilling Rigs by Type
Vertical
Horizontal
Directional
Total
Oil vs. Natural Gas North American Drilling Rigs
Oil
Natural Gas
Total North America
US Average Wells Drilled per Quarter per Rig
demand
Customers’
technology
for
products and services provided by the Company are
dependent on their recognition of the value of:
advanced
‰
‰
‰
Chemistries that improve the economics of their
O&G operations,
Drilling
products
operations and efficiencies, and
are
that
Chemistries
socially responsible and ecologically sound.
economically
improve
drilling
viable,
that
Market prices for citrus oils can be influenced by:
‰
current,
Historical,
future
and
production levels of the global citrus (primarily
orange) crop,
anticipated
‰ 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.
2013
2012
2011
2013
vs.
2012
% Change
1,761
353
2,114
435
1,102
224
1,761
1,606
508
2,114
5.23
1,919
364
2,283
552
1,151
216
1,919
1,621
662
2,283
4.92
1,879
418
2,297
574
1,074
231
1,879
1,263
1,034
2,297
N/A
(8.2) %
(3.0) %
(7.4) %
(21.2) %
(4.3) %
3.7 %
(8.2) %
(0.9) %
(23.3) %
(7.4) %
6.3 %
2012
vs.
2011
% Change
2.1 %
(12.9) %
(0.6) %
(3.8) %
7.2 %
(6.5) %
2.1 %
28.3 %
(36.0) %
(0.6) %
N/A
Source: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); Rig counts are the annual average of the reported weekly rig count activity.
Well counts are the number of wells drilled in the reporting period divided by the average weekly rig count.
24
During year ended 2013, total North American active
drilling rig count saw a decrease when compared to
the comparable periods of 2012 and 2011. The
decline in 2013 was primarily in vertical rig types
and rigs drilling in natural gas fields. 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. While the U.S. drilling activity increased by
2.1% from 2011 to 2012, it decreased by (8.2)% in
2013 compared to 2012. However, the number of
wells drilled per rig per quarter in 2013 has increased
to 5.23 from 4.92 for the same period in 2012.
Outlook for 2014
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.
those pressures impact drilling
To some extent,
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.
is
continuing
The Company is expanding its Energy Chemical
Technologies production capacity in response to
the
In addition,
increasing customer demand.
Company
expand Drilling
to
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.
The Company plans to spend approximately $18
million for capital expenditures
in 2014. The
Company may pursue acquisitions when strategic
opportunities arise.
Omani government, Flotek and Tasneea will
begin the transfer of assets into Flotek Gulf and
Flotek Gulf Research. During 2014, Flotek Gulf
expects to construct a manufacturing facility
designed to develop and produce oilfield
chemistries for use throughout the Middle East
and North Africa.
January 1, 2014,
the Company
Effective
acquired Eclipse IOR Services, LLC (“EOGA”),
a leading enhanced oil
recovery design and
injection firm. EOGA’s expertise in enhanced oil
recovery processes and the use of polymers to
improve the performance of EOR projects will
be combined with the Company’s existing EOR
products and services. The combined product
and service offering will be well positioned to
serve the growing market for EOR products and
services.
In August 2013, the Company entered into an
agreement with Al Mansoori Production Service
Company of Abu Dhabi in the UAE to provide
certain chemistry technologies.
‰
‰
reaction to
The Company believes governmental
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 the
Company’s chemistries as economical replacements
for more hazardous chemicals currently in use in
many drilling and producing operations. Several
states
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.
grass-roots,
countries
have
and
The Company continues to pursue selected strategic
relationships, both domestically and internationally,
to expand its business:
‰
In November 2013,
the Company signed a
shareholder agreement with Tasneea Oil and Gas
Technologies, LLC (“Tasneea”) to form Flotek
Gulf, LLC (“Flotek Gulf”) and Flotek Gulf
Research, LLC (“Flotek Gulf Research”),
Omani-based companies
that will develop,
market and produce specialty chemistries for the
oil and gas industry throughout the Middle East
and North Africa. Upon official approval by the
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
inventory and 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
in revenue and margin
fluctuations from quarter to quarter.
likely result
The Company works to maintain a portfolio of
products which are adaptable to meet our customers’
demands for customized products for the various
25
to
remains
committed
drilling and producing environments in which they
operate. The Company’s commitment
to R&D
permits
the Company to remain responsive to
increased demand and continued growth. The
Company
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 its customers’ needs. The Company believes
that
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.
it
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
is well-
positioned to take advantage of significant increases
in demand for its products should market conditions
improve dramatically in the near term.
the Company
believes
The Company expects that competition for contracts
and margins will remain intense in the future but
believes
and
developmental products and services will enable the
Company to realize incremental gains in market
share in 2014.
improvements
existing
that
in
Changes to global geo-political and economic events
could have an impact, either positive or negative, on
Results of Operations (in thousands):
Revenue
Cost of revenue
Gross margin
Gross margin %
Selling, general and administrative costs
Selling, general and administrative costs %
Depreciation and amortization
Research and development costs
Gain on disposal of long-lived assets
Income from operations
Income from operations %
Change in fair value of warrant liability
Interest and other expense, net
Income before income taxes
Income tax (expense) benefit
Net income
Year ended December 31,
2012
2013
$
371,065
223,538
147,527
$
312,828
181,209
131,619
$
2011
258,785
152,965
105,820
39.8 %
78,197
21.1 %
7,273
3,752
(421)
58,726
15.8 %
—
(1,776)
56,950
(20,772)
36,178
$
$
42.1 %
66,415
21.2%
4,410
3,182
(1,009)
58,621
18.7 %
2,649
(15,812)
45,458
4,333
49,791
$
40.9 %
50,612
19.6 %
3,983
2,337
—
48,888
18.9 %
9,571
(19,189)
39,270
(7,862)
31,408
Net income %
9.7 %
15.9 %
12.1 %
26
Results for 2013 compared to 2012—Consolidated
21.1% for the year ended December 31, 2013
compared to the same period of 2012.
for
the
year
to the
revenue
Consolidated
ended
December 31, 2013 increased $58.2 million, or
18.6%, compared to the year ended December 31,
2012. The increase in revenue for the period was
primarily due
acquisition of Florida
Chemical, which contributed incremental revenue
of $50.9 million during 2013. Excluding the impact
of the acquisition, 2013 revenues increased $7.3
million or 2.3% when compared with 2012, while
the total average North American drilling rig count
decreased by 7.4%. Revenue increases in the
Energy Chemical Technologies and Artificial Lift
Technologies segments were partially offset by
revenue declines
in the Drilling Technologies
segment.
Depreciation and amortization expense not included
in gross margin, for the year ended December 31,
2013 increased by $2.9 million or 64.9% compared
to the year ended December 31, 2012. This increase
was
incremental
attributable
depreciation and amortization of assets recognized
as part of the acquisition of Florida Chemical.
primarily
to
R&D expense increased $0.6 million or 17.9% for
the year ended December 31, 2013, compared to the
year ended December 31, 2012. The increase in
R&D is primarily attributable to new product
development,
to
remaining responsive to increased demand and
continued growth of our product lines.
commitment
Flotek’s
and
Consolidated gross margin for
the year ended
December 31, 2013 increased $15.9 million, or
12.1%, compared to the year ended December 31,
2012. The increase in gross margin was primarily
due to the increase in revenue. The gross margin
percentage decline was primarily attributable to
portfolio mix resulting from the inclusion of Florida
Chemical in 2013 results and proportionately higher
sales of non-proprietary products in the Energy
Chemical Technologies segment and increasing
costs of actuated tools in the Drilling Technologies
segment. This decrease was partially offset by
supply chain benefits from the Florida Chemical
acquisition and proportionately higher sales of
technology tools
in the Drilling Technologies
segment.
SG&A costs for the year ended December 31, 2013
increased by $11.8 million, or 17.7% compared to
the year ended December 31, 2012. Excluding
incremental SG&A costs of $4.9 million associated
with the Florida Chemical business acquired,
SG&A costs increased $6.9 million primarily due to
incurred in 2013 related to executive
costs
severance ($1.0 million),
implementation of the
Company’s new ERP system ($0.8 million), and
expenses related to the pursuit of acquisitions and
initiatives in international markets ($1.7
major
million). Excluding these items and the incremental
SG&A costs of the Florida Chemical business,
SG&A costs
increased $3.4 million or 5.1%
primarily due to increases in headcount, general
insurance, and travel related costs. SG&A costs as a
percentage of revenue decreased from 21.2% to
Interest and other expense for
the year ended
December 31, 2013 decreased by $14.0 million, or
88.8% compared to the year ended December 31,
2012 The decline in interest expense was primarily
due to the repayment of the Company’s convertible
the end of the fourth
notes of $50.3 million at
quarter of 2012 and $5.2 million during the first
quarter of 2013.
The Company recorded an income tax provision of
$20.8 million yielding an effective tax rate of
36.5% for the year ended December 31, 2013,
compared to an income tax benefit of $4.3 million
reflecting an effective tax rate of (9.5)% for the year
ended December 31 2012. The Company’s effective
tax rate in 2012 was affected primarily by an $18.6
million decrease in the valuation allowance against
a deferred tax asset. Additionally, fluctuations in
effective tax rates have historically been impacted
the
by non-cash changes in the fair value of
Company’s warrant
tax
liability and permanent
differences.
Results for 2012 compared to 2011—Consolidated
Revenue for the year ended December 31, 2012
increased by $54.0 million, or 20.9%, compared to
the year ended December 31, 2011. The increase in
revenue for 2012 was driven primarily by increased
sales to new and existing customers of patented
increased sales volumes of
CnF® technologies,
stimulation additives, and increased market share of
centralizer products and float equipment. A key
27
and
drilling
the Company’s oil
driver in the increase of sales was an increase in
customer demand for
tools
resulting from the continued shift away from gas-
directed drilling in North America to oil-directed
drilling. In reaction to the shift in drilling activity
and oil prices, customer product demands increased
for Company products adapted for the current oil-
directed
environments.
activity
Increased sales within the Chemicals segment was
due to the Company’s adaptation of CnF® products
which served as effective oil mobility enhancement
contributors and within the Drilling segment to the
Company’s Teledrift®, Pro Series®, and Prodrift®
tools utilized in oil and liquids based drilling
activity. As a result the Company benefited from
the addition of several new strategic customers,
expansion of our product offerings with existing
customers, increased capacity by shifts in customer
demand to higher margin products. Partially
offsetting the increased sales for the annual 2012
period were decreased sales of $3.4 million within
the Company’s Artificial Lift segment due to the
decline in installs and workovers as a result of
decreased customer activity impacted by the decline
in natural gas prices during 2012 and the
corresponding decline
in natural gas-directed
drilling activity.
products
Consolidated gross margin as a percentage of sales
increased 1.2% to 42.1% for
the year ended
December 31, 2012 compared to 40.9% for the year
ended December 31, 2011. The increase in gross
margin was primarily due to a shift
to a more
favorable product mix during 2012 along with
reductions in materials and operating costs. As a
result of the continued shift in drilling activity and
type the Company’s customers shifted to higher
the Company.
margin
Additionally, the Company recognized cost savings
as a result of negotiated raw material price
concessions with existing vendors in addition to
exploration of raw material sourcing alternatives, as
well as efficiencies gained from new plant and
equipment additions and improved manufacturing
processes. Increased industry recognition of proven
production efficiencies and environmental benefits
derived from use of Flotek’s new and existing
products also increased demand in both the
Chemicals and Drilling segments.
offered
by
SG&A costs for the year ended December 31, 2012,
increased by $15.8 million, or 31.2%, compared to
28
31,
year
ended December
the
2011. The
comparative period over period increase was due
primarily to increased salaries and wages, cash and
equity incentive compensation and professional fees
of $4.7 million, $7.3 million and $1.8 million,
respectively. Salary and wage expense increased as
a result of a 6.9% increase in headcount and
medical and insurance costs due to additional
employees and higher claims in 2012. Cash and
equity incentive compensation increased in 2012
($2.9 million and $4.4 million, respectively) due to
improved period over period performance. The
increase in professional fees was primarily due to
the use of
third party consultants during the
implementation of the new ERP system in 2012.
SG&A as a percentage of revenue for the year
ended December 31, 2012 increased 1.6% to 21.2%
from 19.6% compared to the same period in 2011.
Depreciation and amortization expense, not captured
in gross margin, for the year ended December 31,
2012, increased $0.4 million, or 10.7%, from the year
ended December 31, 2011. This increase was
primarily due to an increase in leased vehicles within
Drilling of approximately 25 vehicles and an increase
of
equipment within
shop
Chemical.
and maintenance
R&D expenses for the year ended December 31,
2012, increased $0.8 million, or 36.2%, from the
year ended December 31, 2011. An increase in
Drilling of $0.2 million and $0.6 million in
Chemical was attributable to increased research
activity related to new product development.
in the fair value of
During the year ended December 31, 2012, non-
cash net gains of $2.6 million were recognized
the
related to changes
Company’s warrant liability, compared to a $9.6
million net gain during 2011. The change was
driven by the change in the fair value of the
exercisable and contingent warrants outstanding
resulting primarily from a decrease
in the
Company’s common share price to $9.53 at
June 14, 2012 from $9.96 at December 31, 2011.
Interest and other net expenses for the year ended
December 31, 2012 totaled $15.8 million, a
decrease of $3.4 million, or 17.6%, from $19.2
million for the year ended December 31, 2011. The
decrease was attributable to a reduction of $4.1
million in interest expense, in the amortization of
issuance costs and debt discounts ($2.2 million and
respectively) period over period
$1.6 million,
associated with
the
term loan in June 2011 and the
Company’s
convertible notes in January 2012 with an increase of
$4.0 million
on
extinguishment of debt.
attributable
repayment
early
loss
the
the
of
to
Income tax benefit for the year ended December 31,
2012 was $4.3 million, an increase of $12.2 million,
or 155.1%, from income tax expense of $7.9 million
Results by Segment
Energy Chemical Technologies (dollars in thousands)
Revenue
Gross margin
Gross margin %
Income from operations
Income from operations %
Results for 2013 compared to 2012—Energy
Chemical Technologies
Energy Chemical Technologies revenue for year
ended December 31, 2013 increased $16.9 million, or
9.2%, relative to the comparable period of 2012.
Excluding the incremental revenue impact of the
Florida Chemical acquisition of $8.0 million, revenue
increased $8.9 million, or 4.9% compared to the year
ended December 31, 2012. The increase in 2013
revenue excluding the Florida Chemical acquisition
was primarily due to an increase in sales of
stimulation chemicals of $7.5 million, or 4.6%.
the year customers increased usage
Throughout
of stimulation chemicals in the Rockies, South Texas
and other North American basins.
Energy Chemical Technologies’ gross margin for the
year ended December 31, 2013 increased $7.1
million, or 8.7%. Gross margin percentage for 2013
declined
primarily
attributable to product portfolio mix resulting from
proportionately higher
sales of non-proprietary
products partially offset by the supply chain benefits
of the Florida Chemical acquisition.
0.2% compared
2012
to
Income from operations for the Energy Chemical
Technologies segment was relatively flat for the year
29
for
the year ended December 31, 2011. The
Company’s effective tax rate for the year ended
December 31, 2012 was (9.5)%, compared to 20.0%
for the year ended December 31, 2011. The change in
the Company’s effective tax rate was primarily due to
the tax effect of a $2.6 million increase of non-cash
fluctuations in the fair value of the Company’s warrant
liability, a $3.9 million permanent deduction for the
Domestic Production Activities Deduction and a $18.6
million decrease in valuation allowance against the
deferred tax asset of one of the filing jurisdictions.
Year ended December 31,
2012
2013
2011
$
$
$
200,932
88,536
44.1 %
65,396
$
$
$
183,986
81,438
$ 140,836
56,115
$
44.3 %
39.8 %
65,440
$
43,549
32.5 %
35.6 %
30.9 %
ended December 31, 2013 compared to 2012. Income
from operations percentage for 2013 decreased 3.1%
compared to the 2012. The decrease in income from
operations
to
is
increased R&D, sales staff and travel costs incurred
in pursuit of growth opportunities.
percentage
primarily
related
Results for 2012 compared to 2011—Energy
Chemical Technologies
Revenue for the Chemicals segment for the year
ended December 31, 2012, increased $43.2 million or
30.6% compared to the year ended December 31,
2011. The primary increase in revenue was driven by
a $27.5 million, or 63.7% increase in sales of
patented CnF® products
to existing and new
customers and approximately a $15.7 million, 36.3%
increase in revenues attributable to increased sales
volumes of stimulation liquids. Given the shift away
from gas-directed drilling in North America to oil-
directed drilling, the Company’s adaptation of CnF®
products to serve as effective oil mobility enhancers
resulted in increased sales. Oil molecules are larger
and more
through low
permeability formation than gas molecules and thus
oil reservoirs benefit even more from the use of
additives such as Flotek’s CnF® products. In general,
revenue growth was the result of the Company’s
to mobilize
difficult
development, strategic adaptation and customization
of proprietary natural gas effective CnF® additives to
oil effective CnF® additives for new and existing
customers, increased market demand and incremental
domestic
and international market penetration.
Increasing industry recognition of proven production
efficiencies and environmental benefits derived from
use of Flotek’s new and existing products increased
demand for CnF® products in both domestic and
international markets.
The Company experienced significant expansion in
the Rocky Mountain regions, primarily the Niobrara
formation. During 2012 the Company continued to
experience increased success of CnF® products with
the addition of major new customers in oily shale
basins where the Company’s CnF® products were
employed. Also contributing to the support of sales
expansion was the Company’s partnerships with
major service companies and the continuous support
of operational efforts to educate the end users of
CnF® products as to the benefits of the CnF®
products. Additionally, the Company saw growth and
expansion in both North Dakota, South Texas, and
the Permian Basin region, primarily in the Bakken,
Wolfcamp, and Eagle Ford formations, respectively.
Gross margin for the year ended December 31, 2012
was $81.4 million, or 44.3% of revenue, compared to
$56.1 million, or 39.8% of revenue for the year ended
December 31, 2011. The increase in gross margin
and gross margin percentage was due primarily to a
Consumer and Industrial Chemical Technologies
(dollars in thousands)
Revenue
Gross margin
Gross margin %
Income from operations
Income from operations %
shift to a more favorable product mix during 2012
along with reductions in materials costs due to
negotiated raw material price concessions with
existing vendors, as well as efficiencies gained from
new plant and equipment additions and improved
manufacturing processes. Cost containment also
remained a focus for the Company in 2012, with
direct operating costs as a percentage of revenue
declining 2.7% due to the continued oversight and
costs. As
management
control of operational
revenues
sold
increased by only 22.1% with direct product costs, in
particular increasing by only 2.8%, when compared
to the same annual period in 2011. Additionally, cost
containment was facilitated by operating efficiencies
realized
of Chemicals’
manufacturing facility and on-going best practice
process improvement initiatives aimed at reducing
labor and overhead costs.
increased 30.6%, cost of goods
from the
expansion
Operating income for the year ended December 31,
2012 totaled $65.4 million, or 35.6% of revenue, an
increase of $21.9 million, or 50.3%, compared to
operating income of $43.5 million, or 30.9% of
revenue, for the year ended December 31, 2011. As a
result of cost management efforts, indirect expense as
a percentage of revenue decreased by 0.1% when
compared to the same annual period of 2011 partially
offset by a $0.6 million increase in R&D activity in
connection with increased activity. The remainder of
favorable variance was due to aforementioned
improvement in period over period gross margin.
Year ended December 31,
2012
2013
2011
$
$
$
42,927
10,659
24.8 %
6,260
14.6 %
$
$
$
—
—
— %
—
— %
$ —
$ —
— %
$ —
— %
Results for 2013 compared to 2012—Consumer and
Industrial Chemical Technologies
CICT revenue for the year ended December 31, 2013
was $42.9 million. Revenue for the year ended
December 31, 2013 is incremental to the Company
for the period as this is a new segment acquired
during the second quarter of 2013. CICT revenue is
primarily driven by demand for d-Limonene and
other bio-based chemistries produced for a multitude
of industries, 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.
30
CICT gross margin for the year to date period ended
December 31, 2013 contributed incrementally to the
Company’s overall consolidated margin as part of the
new segment of business acquired in May 2013. The
primary drivers of the margins of the CICT segment
are demand for the Company’s bio-based chemistries
and the high value flavor and fragrance isolates. The
the citrus oil markets and
general direction of
Drilling Technologies (dollars in thousands)
Revenue
Gross margin
Gross margin %
Income from operations
Income from operations %
$
$
$
seasonality of flavor compounds can also impact
margin results.
Income from operations for year to date period ended
December 31, 2013 contributed incrementally to the
Company’s
from
income
operations over the comparable period of 2012.
consolidated
overall
Year ended December 31,
2012
$
$
$
116,736
45,709
39.2 %
22,282
19.1 %
$
$
$
2013
112,406
43,156
38.4 %
18,306
16.3 %
2011
102,470
43,607
42.6 %
23,035
22.5 %
Results for 2013 compared to 2012—Drilling
Technologies
Drilling Technologies revenue for the year ended
December 31, 2013 decreased $4.3 million or 3.7%
relative to the same period in 2012. Revenue declines
can be primarily attributed to a decline in actuated
tool rentals. A 21% decline in vertical wells in 2013
compared to 2012 has limited the opportunities for
renting tools directly to operators.
‰
‰
‰
Product
Revenue:
Product
revenue was
relatively flat for YTD 2013 as compared to
2012 increasing by $0.6 million or 1.7% due to
improved sales of motor equipment that was a
result of higher sales to existing customers.
Rental Revenue: Rental revenue for the year
ended December 31, 2013 decreased by $6.1
million or 9.0% in comparison to the 2012
period. This decline is due to an $11.1 million or
72.5% decrease in actuated tool rentals caused
by increased competition, competitive pricing
pressure, strategic selection of higher margin
rental jobs, and the above mentioned decline in
vertical wells. Partially offsetting the actuated
tool decrease was an increase in Teledrift® and
Pro Series MWD rentals where international
growth of 45.3% in South America, the Middle
East, Canada and Kazakhstan mitigated the loss
revenue in the US. Also offsetting the
of
actuated tool decline was revenue growth for the
31
new Stemulator™ tool, which was introduced in
the last half of 2013, as well as existing drilling
tool rentals (stabilizers, reamers, collars, etc.).
Service Revenue: The service revenue for the
year to date period ended December 31, 2013
increased $1.1 million, or 8.7%,
relative to
comparable period in 2012. The increased
service
to
and
increased rig installations,
increased pricing of services offered in the
market.
revenue was
inspections
primarily
related
Drilling Technologies gross margin for the year
ended December 31, 2013 decreased by $2.6 million,
or 5.6%, over the comparable period of 2012 due to
the sales decrease and actuated tool cost increases.
As a percentage of revenue gross margin declined by
only 0.8% as a result of actuated tool cost increases
partially offset by an improved product mix resulting
from proportionately higher sales of higher margin
Teledrift® series tools, Stemulator™ tool and other
drilling tools and services.
Drilling Technologies income from operations for the
year ended December 31, 2013 decreased by $4.0
million, or 17.8% and by 2.8% as a percentage of
revenue over the same period in 2012. This decline
was primarily due to the lower revenue and gross
margins, increased sales force related costs, medical
costs, and general insurance expenses.
Results for 2012 compared to 2011—Drilling
Technologies
Drilling revenue for the year ended December 31, 2012
increased $14.3 million, or 13.9%, compared to the year
ended December 31, 2011. The increase in revenue was
attributable to increased domestic and international
market
share from existing and new customers,
favorable shifts in customer demand to higher-margin
products, and increased customer demand as a result of
sustained oil focused drilling activity.
‰
‰
and
product
products
Product Revenue:
revenue
2012
increased $6.4 million as compared to same
annual period of 2011. Increased market share of
centralizer
equipment;
especially in the South Texas and Mid Continent
regions; led to an increase of $3.7 million. In
addition, product revenue increased $2.7 million
period over period from the sales of raised drill
pipe and drill steel equipment; especially to the
international mining industry.
float
Rental Revenue: 2012 revenue from rentals
increased by $4.3 million compared to the same
annual period of 2011. Demand for Teledrift®
and Pro Series® MWD tools accounted for $3.9
the increase domestically in the
million of
Permian Basin
the Granite Wash/
as
Mississipian
internationally in Argentina. A product demand
shift from Teledrift® tools to the higher revenue
Prodrift® tools occurred in 2012 with tool
as well
regions
Lime
and
rentals up 5% in total this year compared to the
same annual period of 2011. Motor,
jar, and
shock rentals also increased by $0.4 million in
the South Texas and Mid Continent regions
where product demand and market share also
contributed to the increase in rental revenue.
‰
Service Revenue: 2012 service revenue increased
by $3.6 million and was directly related to
increased activity in the segment for drilling,
increased prices of services and installations, and
increased inspection services.
Gross margins for Drilling totaled $45.7 million, or
39.2% of revenue, for the year ended December 31,
2012. This represented an increase of $2.1 million, or
4.8% compare to 2011 gross margins of $43.6
million, or 42.6% of revenue. The increase in gross
margin was driven by increased product, rental and
service pricing in 2012 and more favorable margins
on the product mix in centralizer and drill pipe sales,
but tempered by increased repair and equipment costs
for motor rentals.
Operating income for the year ended December 31,
2012 was $22.3 million, or 19.1% of revenue, a
decrease of $0.8 million, or 3.3% from operating
income of $23.0 million, or 22.5% of revenue, for the
year ended December 31, 2011. Operating income
and operating income margins declined during 2012
due to rising employee-related expenses during 2012
related to increased activity, partially offset by gains
recognized on the disposal of operating assets.
Artificial Lift Technologies (dollars in thousands)
Revenue
Gross margin
Gross margin %
Income from operations
Income from operations %
Year ended December 31,
2012
2011
2013
$
$
$
14,800
5,176
35.0 %
3,060
20.7 %
$
$
$
12,106
4,472
36.9 %
3,395
28.0 %
$
$
$
15,479
6,098
39.4 %
4,296
27.8 %
Results for 2013 compared to 2012—Artificial Lift
Technologies
Artificial Lift revenue is primarily derived from coal
bed methane (“CBM”) drilling activity, and is
impacted by the price of natural gas; although the
segment is starting to diversify into more oil related
the
equipment
sales and service. Revenue for
Artificial Lift Technologies segment for the year
ended December 31, 2013 increased by $2.7 million,
or 22.3%, relative to the same period in 2012. The
introduction of SSI Lift Systems in the second half of
2013; as well as
increased pump and pump
equipment sales led to the revenue increase. This
rebound in the gas
increase is due to a slight
32
workover drilling market, additional installations in
2013, and more oil related equipment sales.
Artificial Lift Technologies gross margins increased
the year ended
by $0.7 million or 15.7% for
December 31, 2013, relative to the same period in
2012 due to the increased sales. As a percentage of
revenue, gross margin has declined by 1.9% year to
date from 2012 as the increase in revenue in 2013 is
almost entirely made up of oil related surface pump
equipment which carries much lower margins than
the international valve sales, which were flat year
over year.
Income from operations decreased $0.3 million or
9.9%, for the year ended December 31, 2013.
Operating income in 2013 would have remained the
same as 2012 without the onetime gain on disposal
of an operational asset included in 2012 operating
results.
Results for 2012 compared to 2011—Artificial Lift
Technologies
for
the
year
revenue
Artificial Lift
ended
December 31, 2012 was $12.1 million, a decrease
of $3.4 million, or 21.8%, from the year ended
December 31, 2011. The largest decline was
attributed to a 85% decrease year over year in new
gas well installs and a 50% decrease year over year
for workovers for pump products. There was also a
20% decrease in international valve sales. Customer
activity and demand decreased as a result of the
decline in natural gas prices during 2012 and the
in natural gas-directed
corresponding decline
drilling activity. The annual monthly average
natural gas prices decreased by $1.19/mmBtu or
30.2% to $2.75/mmBtu compared to $3.94/mmBtu
in the comparable period of 2011. Total North
America annual average monthly natural gas
drilling rig count decreased by 372 rigs or 36.0%,
totaling 662 rigs as compared to 1,034 rigs for the
same period in 2011.
Gross margin for the year ended December 31,
2012 was $4.5 million, a decrease of $1.6 million,
or 26.7%, from the year ended December 31, 2011.
Gross margin as a percentage of revenue was 36.9%
for the year ended December 31, 2012, down from
39.4% for the year ended December 31, 2011. The
decline
and gross margin
percentage was attributable to lower sales of pumps
and pump products and downward pricing pressure
for products used in gas-directed drilling activities.
in gross margin
a
31,
decrease
Operating income was $3.4 million for the year
2012,
ended December
of
$0.9 million, or 21.0%,
from 2011. Operating
income as a percentage of revenue was 28.0% for
the year ended December 31, 2012 compared to
27.8% for the year ended December 31, 2011. The
decline
primarily
attributable to the decline in revenue and gross
margin discussed above, partially offset by gains
recognized in connection with the disposal of
operational assets. The slight
in
operating income margins during 2012 compared to
2011 is due to indirect cost controls put in place in
response to the decline in revenue.
income was
improvement
operating
in
Capital Resources and Liquidity
Overview
The Company’s capital requirements during 2013
resulted from the Company’s acquisition of Florida
Chemical, debt service, acquiring and maintaining
equipment, and working capital requirements. To
satisfy these capital requirements,
the Company
refinanced its credit facility with PNC bank and
to fund its operating requirements
continues
primarily through operating cash flows. The
Company’s primary source of debt financing is its
credit facility with PNC Bank. This credit facility
contains provisions for revolving debt of up to $75
million, based on receivables
and inventory
borrowing base, and a term loan of $50 million
based on tangible and intangible assets. As of
the Company had $16.3
December 31, 2013,
million outstanding borrowings under the revolving
debt
facility. As of
December 31, 2013 the Company had $45.8 million
of outstanding term borrowings under its credit
facility. At December 31, 2013,
the Company
remained compliant with debt covenants under its
credit facility. Significant terms of the Company’s
credit facility are discussed under “Item 8. Financial
Statements and Supplementary Data” within Note
10 of the Notes to the Company’s Consolidated
Financial Statements.
portion
credit
the
of
the Company remained
At December 31, 2013,
compliant with the continued listing standards of
the NYSE.
Cash and cash equivalents totaled approximately
$2.7 million at December 31, 2013. During 2013,
the Company generated $39.5 million of cash
33
(net of $19.3 million
inflows
from operations
expended in working capital),
received gross
proceeds of $339.6 million from the issuance of new
debt and received $5.8 million in proceeds related to
lost-in-hole and asset sales activity. Offsetting these
cash inflows,
the Company paid $53.4 million
associated with the purchase of Florida Chemical,
paid down $307.7 million of debt, $15.0 million used
in capital expenditure and $2.7 million in capital
lease payments.
On January 1, 2014, the Company paid $5.3 million
in cash associated with the purchase of EOGA.
Additional details of
the EOGA purchase are
discussed under “Item 8. Financial Statements and
Supplementary Data, Note 19-Subsequent Events.”
Cash Flows
Liquidity
for
and
planned
committed
The Company plans to spend approximately $18
million
capital
expenditures in 2014. The Company expects to
generate sufficient cash from operations to fund its
capital expenditures and make required payments on
the term loan, including any prepayments that may be
If
required under
the Company will utilize its available
necessary,
capacity under the revolving credit agreement
to
fulfill its liquidity needs. Any excess cash generated
will likely be used to pay down the level of debt. The
Company may pursue acquisitions when strategic
opportunities arise and may access external financing
to fund those acquisitions, if needed.
facility agreement.
the credit
Cash flow metrics from the consolidated statements of cash flows are as follows (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of changes in exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Operating Activities
Year ended December 31,
2012
2013
2011
$ 39,548
(62,700)
23,501
(319)
$ 49,515
(15,200)
(78,301)
4
$32,423
(4,942)
(521)
(141)
$
30
$(43,982) $26,819
During 2013, 2012 and 2011, cash from operating
activities totaled $39.5 million, $49.5 million and
$32.4 million,
net
earnings for 2013 totaled $36.2 million, compared to
consolidated net earnings of $49.8 million for 2012
and a consolidated net earnings of $31.4 million for
2011.
respectively. Consolidated
deferred financing costs and accretion of debt
discount ($4.7 million), share-based compensation
expense ($13.4 million) and non-cash losses on the
early extinguishment of debt ($4.8 million), partially
offset by deferred income taxes ($18.7 million) net
gains on asset disposals ($4.8 million) and changes in
the fair value of the warrant liability ($2.6 million).
expense
Noncash items recognized in 2013 totaled $22.7
million, consisting primarily of depreciation and
amortization
stock
compensation expense ($10.9 million), provisions
related to accounts receivables and inventories ($1.9
million) partially offset by gain on sale of assets
($4.6 million) and excess tax benefit related to share-
based awards ($1.7 million).
($15.1 million),
Noncash items recognized in 2012 totaled $10.4
million, consisting primarily of depreciation and
amortization expense ($11.6 million), amortization of
34
in
2011
items
recognized
Noncash
totaled
$18.6 million, which consisted of asset depreciation
and amortization ($10.1 million), amortization of
deferred financing costs and accretion of debt
discount ($8.4 million), stock compensation expense
($7.4 million), loss on the extinguishment of debt
($3.2 million) and deferred income tax provision
($1.2 million) offset by a reduction in the fair market
value of the warrant liability ($9.6 million), net gain
on the sale of assets of ($3.4 million) and an increase
in the tax benefit related to share-based awards ($0.6
million).
During 2013 changes in working capital used $19.3
million, primarily consisting of
lower payables
($21.3 million), higher receivables ($9.9 million),
partially offset by lower inventories ($4.5 million),
higher accrued liabilities ($4.1 million) and higher
income taxes payables ($2.2 million).
During 2012 changes in working capital used $10.6
million in cash. Changes in working capital during
2012 reflected our increased activity levels, with the
use being driven primarily by increased inventories
($9.4 million), increased other current assets ($2.1
($1.9 million) and
million) accrued liabilities
interest payable ($2.0 million), partially offset by
decreased accounts receivable ($1.8 million) and
increased accounts payable ($2.5 million), and a
decrease in income taxes payable ($0.4 million).
increased demands of
During 2011 changes in working capital used
$17.5 million of cash. The change in working
capital was primarily due to working capital
the
utilization to meet
improved global economic environment. Use of
evidenced by increased
working capital was
accounts
increased
inventory ($11.1 million) and increased other
current asset ($0.9 million) offset by reductions in
working capital obligations within accounts payable
($5.0 million) and federal
income tax payable
($7.6 million).
($17.9 million),
receivable
Investing Activities
During 2013 investing activities used cash of $62.7
million, including ($53.4) million associated with
the purchase of Florida Chemical, ($15.0) million in
capital expenditures partially offset by proceeds
($5.8 million). Capital
from sales of
expenditures for 2013 decreased when compared to
2012 primarily due to lower spending on both
drilling technologies facilities expansion and the
Company’s new ERP system.
assets
During 2012 and 2011, investing activities used
cash of $15.2 million and $4.9 million respectively.
Capital expenditures were $20.7 million and $10.0
million respectively. Cash flows used in investing
activities during 2012 and 2011 were partially
offset with proceeds from the sale of assets of $5.5
million, $5.3 million, respectively.
Capital expenditures for 2012 increased over 2011
in equipment and
due to increased investment
facilities in order
demand, and investment in a new ERP system.
to meet
increased customer
Financing Activities
term loan
($26.2 million),
During 2013 financing activities generated $23.5
million primarily related to borrowings under the
Company’s
and
revolving line of credit ($16.3 million), partially
offset by debt payments ($13.2 million) and equity
related
primarily
purchase of treasury stock. The increase borrowings
under the term loan and the revolving line of credit
were related to the Company’s acquisition of
Florida Chemical.
($4.5 million)
transactions
During 2012 and 2011, financing activities used net
cash of $78.3 million and $0.5 million, respectively.
The primary uses of cash for financing activities
during 2012 were the payments on capital lease
obligations and the retirement of convertible notes
($102.4 million) and purchases of treasury stock for
tax withholding purposes ($2.0 million). Cash
outflows for
financing activities were partially
offset by proceeds from the issuance of our 2012
Term Loan ($25.0 million).
fees
of Revolving Credit
During 2011, the Company repaid $32.6 million
and made
outstanding Term Loan principal
$0.7 million of capital lease payments. Additional
cash used during 2011 consisted of $1.0 million of
related to the Term Loan,
commitment
Facility
$0.4 million
origination fees, and $0.8 million of common stock
repurchases associated with vesting of equity grants
and corresponding tax payments settled in equity.
Offsetting cash used were $29.4 million of proceeds
the
from the sale of 3.6 million shares of
Company’s common stock on May 11, 2011, $4.8
million in proceeds from warrant exercises, $0.6
million of increased excess tax benefits related to
stock-based compensation and $0.1 million of
proceeds from the exercise of stock options.
As noted in the Company’s previous quarterly
filings, the Company intends to file a “universal”
shelf registration with the Securities and Exchange
Commission in the coming weeks. This shelf
registration statement will register the issuance and
sale from time to time of various securities by the
Company, including but not limited to senior notes,
subordinated notes, preferred stock, common stock,
35
and warrants. Once this shelf registration statement is
filed with the Securities and Exchange Commission
and becomes effective, the Company will have the
financial flexibility to access the capital markets
quickly and efficiently from time to time as the need
may arise.
Off-Balance Sheet Arrangements
There have been no transactions
that generate
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as
“structured finance” or “special purpose entities”
(“SPEs”), established for the purpose of facilitating
off-balance sheet arrangements or other contractually
narrow or limited purposes. As of December 31,
involved in any
2013,
unconsolidated SPEs.
the Company was not
The Company has not made any guarantees to
customers or vendors nor does the Company have
any off-balance sheet arrangements or commitments,
that have, or are reasonably likely to have, a current or
future effect on the Company’s financial condition,
change in financial condition,
revenue, expenses,
results of operations, liquidity, capital expenditures or
capital resources that is material to investors.
Contractual Obligations
Cash flows from operations are dependent on a
variety of factors, including fluctuations in operating
results, accounts receivable collections,
inventory
management, and the timing of payments for goods
impact of
and services. Correspondingly,
contractual obligations on the Company’s liquidity
and capital resources in future periods is analyzed in
conjunction with such factors. Material contractual
amounts
obligations
borrowed through the term loan and operating lease
obligations. Contractual obligations at December 31,
2013 are as follows (in thousands):
repayment
consist
the
of
of
Term loan (2012 Term Loan)
Interest expense on term loan (1)
Borrowings under revolving credit facility (2)
Operating lease obligations
Total
Payments Due by Period
Total
1 year
2 - 3 years
4 -5 years
More than
5 years
45,833
5,837
16,272
9,177
77,119
10,143
1,665
16,272
1,598
29,678
$
$
14,286
2,866
-
2,476
19,628
21,404
1,306
-
1,552
24,262
$
$
-
-
-
3,551
3,551
$
(1)
(2)
For the purpose of this calculation, interest rates on variable rate obligations remain unchanged from December 31, 2013.
The borrowing is classified as current debt. The weighted-average interest rate is 1.84% at December 31, 2013.
Critical Accounting Policies and Estimates
Revenue Recognition
The Company’s consolidated financial statements
have been prepared in accordance with accounting
principles generally accepted in the United States of
America (“GAAP”). Preparation of these statements
requires management to make judgments, estimates
and assumptions that affect the amounts of assets and
liabilities in the financial statements and revenue and
expenses during the reported periods. Significant
accounting policies are described in Note 2 “Summary
of Significant Accounting Policies” in the Notes to
Consolidated Financial Statements. The Company
believes the following accounting policies are critical
due to the significant,
subjective and complex
judgments and estimates required when preparing the
consolidated financial
statements. The Company
regularly reviews the judgments, assumptions and
estimates related to the critical accounting policies.
Revenue for product sales and services is recognized
when all of the following criteria have been met:
(a) persuasive evidence of an arrangement exists,
(b) products are shipped or services rendered to the
customer and all significant risks and rewards of
ownership have passed to the customer, (c) the price to
and
the
(d) collectability is reasonably assured. The Company’s
products and services are sold based on a purchase order
and/or contract and have fixed or determinable prices.
There is typically no right of return or any significant
post-delivery obligations. Probability of collection is
assessed on a customer-by-customer basis.
determinable,
customer
fixed
and
is
Revenue and associated accounts receivable in the
and
Energy Chemicals
technologies, Consumer
Industrial
Drilling
Technologies,
and Artificial Lift Technologies
Technologies
Chemical
36
segments are recorded at the agreed price when the
aforementioned conditions are met. Generally a
signed proof of obligation is obtained from the
customer (delivery ticket or field bill for usage).
Deposits and other funds received in advance of
delivery are deferred until the transfer of ownership
is complete.
the
using
as well
The Logistics division of chemicals recognizes
revenue related to design and construction oversight
contracts
percentage-of-completion
method of accounting, measured by the percentage
of costs incurred to date proportionate to the total
estimated costs of completion. This calculated
percentage is applied to the total estimated revenue
at completion to calculate revenue earned to date.
Contract costs include all direct labor and material
costs,
related to
manufacturing and construction operations. General
and administrative costs are charged to expense as
incurred. Changes in job performance metrics and
estimated profitability, including those arising from
contract bonus and penalty provisions and final
contract settlements, may periodically result
in
and are
revisions
recognized in the period in which such revisions
become probable. Known or anticipated losses on
contracts are recognized when such amounts
become probable and estimable.
and expenses
to revenue
indirect
costs
as
Within the Drilling segment, revenue is recognized
upon receipt of a signed and dated field billing
ticket from the customer. Customers are charged
contractually agreed amounts for oilfield rental
equipment damaged or lost-in-hole (“LIH”). LIH
proceeds are recognized as
revenue and the
associated carrying value is charged to cost of sales.
Revenue for equipment sold by the Artificial Lift
segment is recorded net of any credit issued for
return of an item for
the
equipment exchange program.
refurbishment under
Sales tax collected from customers is not included
in revenue but rather is accrued as a liability for
future
taxing
authorities.
remittance
respective
the
to
Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations
of customers and grants credit based upon historical
payment history, financial condition and industry
37
expectations as available. Determination of
the
collectability of amounts due from customers
requires the Company to use estimates and make
regarding future events and trends,
judgments
including monitoring customers’ payment history
and current credit worthiness in order to determine
reasonably assured. The
that
collectability is
Company also considers
the overall business
climate in which its customers operate.
judgments and estimates
These uncertainties require the Company to make
frequent
regarding a
customers’ ability to pay amounts due in order to
assess and quantify an appropriate allowance for
doubtful accounts. The primary factors used to
quantify the allowance are customer delinquency,
bankruptcy, and the Company’s estimate of its
ability to collect outstanding receivables based on
the number of days
receivable has been
a
outstanding.
affect
customers’
The majority of the Company’s customers operate
in the energy industry. The cyclical nature of the
industry may
operating
performance and cash flows, which could impact
these
ability
the Company’s
obligations. Additionally,
are
located in international areas that are inherently
subject
to risks of economic, political and civil
instability.
to
some
customers
collect
on
The Company continues to monitor the economic
climate in which its customers operate and the
aging of its accounts receivable. The allowance for
doubtful accounts is based on the aging of accounts
and an individual assessment of each invoice. At
December 31, 2013, the allowance was 1.3% of
an
gross
allowance of 1.7% an year earlier. While credit
losses have historically been within expectations
and the provisions established, should actual write-
offs differ
to the
allowance would be required.
from estimates,
receivable,
compared
revisions
accounts
to
Inventory Reserves
raw materials, work-in-
Inventories consist of
process and finished goods and are stated at the
lower of cost or market, using the weighted-average
cost method. Finished goods inventories include
raw materials, direct labor and production overhead.
The Company’s inventory reserve represents the
excess of the inventory carrying value over the
amount expected to be realized from the ultimate
sale or other disposal of the inventory.
reviews
regularly
The Company
inventory
quantities on hand and records provisions for excess
or obsolete inventory based on the Company’s
forecast of product demand, historical usage of
inventory on hand, market conditions, production
and procurement requirements and technological
developments. Significant or unanticipated changes
in market conditions or Company forecasts could
affect
the amount and timing of provisions for
excess and obsolete inventory.
industry trends. Significant
Significant changes have not been made in the
methodology used to estimate the reserve for excess
and obsolete inventory during the past three years.
Specific assumptions are updated at the date of each
evaluation to consider Company experience and
current
is
required to predict the potential impact which the
current business climate and evolving market
conditions
the Company’s
assumptions. Changes which may occur in the
energy industry are hard to predict and they may
occur rapidly. To the extent that changes in market
conditions result
in adjustments to management
assumptions, impairment losses could be realized in
future periods.
judgment
could
have
on
‰
‰
‰
tax assets and liabilities assumed from the
acquiree;
stock awards assumed from the acquiree that
are included in the purchase price; and
pre-acquisition obligations and contingencies
assumed from the acquiree.
Although the Company believes the assumptions
and estimates it has made in the past have been
reasonable and appropriate, they are based in part or
historical experience and information obtained from
the management of the acquired companies and are
inherently uncertain.
Goodwill
that would indicate
frequently if
change
Goodwill is not subject to amortization, but is tested
for impairment annually during the fourth quarter,
an event occurs or
or more
circumstances
a
potential
impairment. These circumstances may
include, but are not limited to, a significant adverse
change in the business climate, unanticipated
competition, or a change in projected operations or
results of a reporting unit. Goodwill is tested for
level. At
impairment
December 31, 2013, only three reporting units,
Energy Chemical Technologies, Consumer and
Industrial Chemical Technologies and Teledrift,
have a goodwill balance.
reporting
unit
at
a
At December 31, 2013, the reserve for excess and
obsolete inventory was $2.7 million or 4.2% of
inventory. A year earlier the reserve was $2.8
the
million or 5.7% of inventory. Additionally,
provision charged to expense for excess and
obsolete inventory has increased to $1.3 million and
was $0.9 million for the annual periods 2013 and
2012, respectively. Inventory turns, however, have
decreased to 4.1 times in 2013 compared to 2012
inventory turns of 4.4 times.
Business Combinations
The purchase price of the acquired companies is
allocated to the tangible and intangible assets
acquired and liabilities assumed, as well as to in-
process R&D, based upon their estimated fair
values at the acquisition date. The purchase price
allocation process requires the management to make
significant
the
acquisition date with the respect to the fair value of:
and assumptions
estimates
at
‰
intangible assets acquired from the acquiree;
38
During annual goodwill impairment testing in 2013,
2012 and 2011,
the Company first assessed
qualitative factors to determine whether it was
necessary to perform the
two-step goodwill
impairment test that the Company has historically
used. Based on its qualitative assessment,
the
Company concluded that there was no indication of
the need for an impairment of goodwill as of the
fourth quarter of 2013, 2012 or 2011, and therefore
no further testing was required.
to its carrying amount,
If impairment testing is required, the Company uses
a two-step process. The first step is to compare the
estimated fair value of each reporting unit which
including
has goodwill
the
goodwill. To determine fair value estimates,
Company uses the income approach based on
discounted cash flow analyses, combined with a
market-based approach. The market-based approach
considers valuation comparisons of recent public
sale transactions of similar businesses and earnings
multiples of publicly traded businesses operating in
industries consistent with the reporting unit. If the
fair value of a reporting unit is less than its carrying
value, the second step of the impairment test is
performed to determine the amount of impairment,
if any. The second step compares the implied fair
value of
the reporting unit goodwill with the
carrying amount of the goodwill. If the carrying
amount of the reporting unit’s goodwill exceeds its
implied value, an impairment loss is recognized in
an amount equal to that excess.
environment, increases in the Company’s weighted
average cost of capital, material negative changes in
relationships with significant customers, reductions
in valuations of other public companies in the
Company’s industry, or strategic decisions made in
response to economic and competitive conditions. If
actual results are not consistent with the Company’s
current estimates and assumptions, impairment of
goodwill could be required.
Long-Lived Assets Other than Goodwill
and
industry
assumptions
assumptions
apply
factors
the Company’s
The Company determines fair value using widely
accepted valuation techniques, including discounted
cash flows and market multiples analyses, and
through use of independent fixed asset valuation
firms, as appropriate. These types of analyses
contain uncertainties as they require management to
judgments
make
to
and the
regarding industry economic
profitability of
strategies. The
future business
Company’s policy is to conduct impairment testing
taking into
based on current business strategies,
economic
consideration
and
current
future
conditions, as well as
the
used
expectations. Key
in
discounted cash flow valuation model
include,
among others, discount rates, growth rates, cash
flow projections and terminal value rates. Discount
rates and cash flow projections are the most
sensitive and susceptible to change as they require
significant management judgment. Discount rates
are determined using a weighted average cost of
capital (“WACC”). The WACC considers market
and industry data, as well as Company-specific risk
factors for each reporting unit in determining the
appropriate discount rate to be used. The discount
rate utilized for each reporting unit is indicative of
the return an investor would expect to receive for
investing in a similar business. Management uses
industry
and Company-specific
historical and projected results to develop cash flow
projections for each reporting unit. Additionally, as
part of the market multiples approach, the Company
utilizes market data from publicly traded entities
whose businesses operate in industries comparable
to the Company’s reporting units, adjusted for
certain factors that increase comparability.
considerations
The Company cannot predict
the occurrence of
events or circumstances that could adversely affect
the fair value of goodwill. Such events may include,
but are not limited to, deterioration of the economic
39
and indefinite
Long-lived assets other than goodwill consist of
property and equipment and intangible assets that
have determinable
lives. The
Company makes judgments and estimates regarding
including
the carrying value of
amounts
capitalized, depreciation and
amortization methods to be applied, estimated
useful lives and possible impairments. Property and
equipment and intangible assets with determinable
lives are tested for impairment whenever events or
changes in circumstances indicate the carrying
value of the asset may not be recoverable.
these assets,
to be
of
an
and
events
property
equipment,
or
For
circumstances indicating possible impairment may
include a significant decrease in market value or a
significant change in the business climate. An
impairment loss is recognized when the carrying
amount
estimated
undiscounted future cash flows expected to result
from the use of
the asset and its eventual
disposition. The amount of the impairment loss is
the excess of the asset’s carrying value over its fair
value. Fair value is generally determined using an
appraisal by an independent valuation firm or by
using a discounted cash flow analysis.
exceeds
asset
the
For intangible assets with definite lives, events or
circumstances indicating possible impairment may
include an adverse change in the extent or manner
in which the asset is being used or a change in the
assessment of
future operations. The Company
assesses the recoverability of the carrying amount
by preparing estimates of future revenue, margins
and cash flows. If the sum of expected future cash
flows (undiscounted and without interest charges) is
less than the carrying amount, an impairment loss is
recognized. The impairment loss recognized is the
amount by which the carrying amount exceeds the
these assets may be
fair value. Fair value of
determined
by
including discounted cash flows.
variety
a
of methodologies,
to
are
but
tested
amortization,
Intangible assets with indefinite lives are not
for
subject
impairment annually during the fourth quarter, or
more frequently if an event occurs or circumstances
change that would indicate a potential impairment.
These circumstances may include, but are not
limited to, a significant adverse change in the
business climate, unanticipated competition, or a
change in projected operations or
results of a
reporting unit.
In 2013, while testing annual
indefinite lived
intangible assets for impairment, the Company first
assessed qualitative factors to determine whether it
was necessary to perform the impairment
test.
Based on its qualitative assessment, the Company
concluded that there was no indication of the need
for an impairment of indefinite lived intangibles as
of the fourth quarter of 2013, and therefore no
further testing was required.
impairment
testing for
the indefinite lived
If
the Company then
intangible assets is required,
performs the quantitative impairment
test. The
quantitative impairment test for an indefinite-lived
intangible asset consists of a comparison of the fair
value of the asset with its carrying amount. If the
carrying amount of an intangible asset exceeds its
fair value, an impairment loss is recognized in an
amount equal to that excess. Fair value of these
assets may be determined by a variety of
methodologies, including discounted cash flows.
is
potential
The development of future net undiscounted cash
flow projections requires management projections
of future sales and profitability trends and the
estimation of remaining useful lives of assets. These
projections are consistent with those projections the
Company uses to internally manage operations.
a
impairment
When
discounted cash flow valuation model similar to
that used to value goodwill at the reporting unit
level,
incorporating discount rates commensurate
with risks associated with each asset, is used to
determine the fair value of the asset in order to
measure potential impairment. Discount rates are
determined by using a WACC. Estimated revenue
and WACC assumptions are the most sensitive and
susceptible to change in the long-lived asset
analysis as they require significant management
identified,
judgment. The Company believes the assumptions
used are reflective of what a market participant
would have used in calculating fair value.
Valuation methodologies utilized to evaluate long-
lived assets other than goodwill for impairment
were
consistent with prior periods. Specific
assumptions discussed above are updated at each
test date to consider current industry and Company-
specific risk factors from the perspective of a
market participant. The current business climate is
subject to evolving market conditions and requires
significant management judgment to interpret the
potential impact to the Company’s assumptions. To
that changes in the current business
the extent
climate result
to management
in adjustments
projections, impairment losses may be recognized
in future periods.
No impairment was recorded for property and
equipment and intangible assets with indefinite or
determinable lives during 2013, 2012 and 2011.
Warrant Liability
Prior to June 2012, the Company used the Black-
Scholes option-pricing model to estimate the fair
value of its warrant liability. On June 14, 2012,
provisions in the Company’s outstanding warrants
were amended to eliminate anti-dilution price
adjustment provisions as well as cash settlement
provisions of a change of control event. Upon
amendment the warrants met the requirements for
classification as equity. All fluctuations in the fair
value of the warrant liability prior to June 2012
were recognized as non-cash income or expense
items within the Statement of Operations. Historical
non-cash fair value accounting methodology for the
warrant liability is no longer required due to the
contractual amendment.
Fair Value Measurements
Fair value is defined as the amount that would be
received for the sale of an asset or paid for the
transfer of a liability in an orderly transaction
between unrelated third party market participants at
the measurement date. In determination of fair
value measurements for assets and liabilities the
or most
the
Company
advantageous market, and assumptions that market
participants would use when pricing the asset or
principal,
considers
40
liability. The Company categorizes financial assets
and liabilities using a three-tiered fair value
hierarchy, based upon the nature of the inputs used
in the determination of fair value. Inputs refer
broadly to the assumptions that market participants
would use in pricing an asset or liability and may be
observable or unobservable. Significant judgments
and estimates are required, particularly when inputs
are based on pricing for similar assets or liabilities,
pricing in non-active markets or when unobservable
inputs are required.
Income Taxes
subject
jurisdictions
tax provision is
to
The Company’s
judgments
and estimates necessitated by the
complexity of existing regulatory tax statutes and
the effect of these upon the Company due to
operations in multiple tax jurisdictions. Income tax
expense is based on taxable income, statutory tax
rates and tax planning opportunities available in the
in which the Company
various
operates. The Company’s income tax expense will
fluctuate from year to year as the amount of pretax
income fluctuates. Changes in tax laws, and the
Company’s profitability within and across the
jurisdictions may impact
tax
liability. While the annual tax provision is based on
the best information available to the Company at
the time of preparation, several years may elapse
before the ultimate tax liabilities are determined.
the Company’s
are
recognized for
The Company uses
liability method in
the
accounting for income taxes. Deferred tax assets
and liabilities
temporary
differences between financial statement carrying
amounts and the tax bases of assets and liabilities,
and are measured using the tax rates expected to be
in effect when the differences reverse. Deferred tax
assets are also recognized for operating loss and tax
credit carry forwards. The effect on deferred tax
assets and liabilities of a change in tax rates is
recognized in the results of operations in the period
that
includes the enactment date. A valuation
allowance is used to reduce deferred tax assets
when uncertainty exists regarding their realization.
A valuation allowance is
recorded to reduce
previously recorded tax assets when it becomes
more-likely-than-not
such assets will not be
realized. The Company evaluates, at least annually,
net operating loss carry forwards and other net
deferred tax assets and considers all available
41
as
negative
significant
evidence, both positive and negative, to determine
whether, a valuation allowance is necessary relative
to net operating loss carry forwards and other net
deferred tax assets. In making this determination,
the Company considers cumulative losses in recent
years
evidence. The
Company considers recent years to mean the
current year plus the two preceding years. The
Company considers the recent cumulative income
or loss position of its filings groups as objectively
verifiable evidence for the projection of future
income, which consists primarily of determining the
average of the pre-tax income of the current and
prior two years after adjusting for certain items not
indicative of future performance. Based on this
analysis,
the Company determines whether a
valuation allowance is necessary.
In 2009, general economic deterioration and,
in
particular, a downturn in the oil and gas industry
had a negative impact on earnings. The Company
incurred losses and, during the three months ended
September 30, 2009,
it violated certain debt
covenants. As a result, the Company disclosed that
it might not be able to continue as a going concern
if it was unable to secure additional financing and
successfully implement corrective actions to remain
listed on the NYSE. The Company was unable to
project
the
from future
strategies.
consideration
Accordingly, at September 30, 2009, management
determined it was appropriate to record a full
valuation allowance against its deferred tax assets.
planning
income
events
tax
or
of
The Company’s tax filing group with net operating
loss carryforwards continued to have operating
losses during each quarter of 2010. Beginning with
this tax filing group
the first quarter of 2011,
returned to profitability. Profits continued during
each subsequent quarter of 2011 and during each
quarter of 2012. As of December 31, 2012, this tax
filing group was no longer in a cumulative loss
position for the most recent 12-quarter period. The
calculated
this
annual
12-quarter period, adjusted for a nonrecurring
impairment of fixed assets in 2010, was $3 million.
The
income was
projected for future years in the loss carryforward
period. This projection of income and reversing
temporary differences demonstrated that
the net
operating loss would be fully utilized during the
carryforward period.
calculated
average
average
income
annual
for
The Company weighed the negative evidence of the
existence of a recent cumulative loss more heavily
than the positive evidence of a return to profitability
during 2011 and 2012. Not being in a cumulative
loss position as of December 31, 2012 removed the
significant negative evidence. In addition, the tax
filing group now had eight consecutive quarters of
profitability, and projections of income based on
objectively verifiable positive evidence provided
additional positive evidence. The Company also
considered other factors, including a determination
that there were no unsettled circumstances that, if
unfavorably resolved, would adversely affect future
operations or profit levels in future years and the
fact
the Company does not operate in a
traditionally cyclical business. Based on the weight
the above positive evidence and a lack of
of
negative evidence,
the Company removed the
valuation allowance for deferred tax assets of $16.5
million at December 31, 2012 and recognized a
reduction of deferred federal income tax expense.
that
The tax filing group was in a cumulative loss
position for the most recent 12-quarter periods
ended on March 31, June 30 and September 30,
2012.
The Company periodically identifies and evaluates
uncertain tax positions. This process considers the
amounts and probability of various outcomes that
could be realized upon final settlement. Liabilities
for uncertain tax positions are based on a two-step
process. The actual benefits ultimately realized may
differ from the Company’s estimates. Changes in
facts, circumstances, and new information may
require a change in recognition and measurement
estimates for certain individual tax positions. Any
changes in estimates are recorded in results of
operations in the period in which the change occurs.
At December 31, 2013, the Company performed an
evaluation of
and
concluded that it did not have significant uncertain
tax positions requiring disclosure. The Company’s
policy is to record interest and penalties related to
income tax matters as income tax expense.
tax positions
its various
Share-Based Compensation
The Company has stock-based incentive plans
which are authorized to issue stock options,
restricted stock and other incentive awards. Stock-
based compensation expense for stock options and
restricted stock is determined based upon estimated
42
including
grant-date fair value. This fair value for the stock
options
is calculated using the Black-Scholes
option-pricing model and is recognized as expense
over the requisite service period. The option-pricing
requires the input of highly subjective
model
assumptions,
price
volatility and expected option life. For all stock-
based incentive plans, the Company estimates an
expected forfeiture rate and recognizes expense
only for
those shares expected to vest. The
estimated forfeiture rate is based on historical
experience. To the extent actual forfeiture rates
differ from the estimate, stock-based compensation
expense is adjusted accordingly.
expected
stock
Loss Contingencies
that
loss
arise
in determining potential
to a variety of
during
loss
The Company is subject
contingencies
the
could
Company’s conduct of business. Management
considers the likelihood of a loss or the impairment
of an asset or the incurrence of a liability, as well as
the Company’s ability to reasonably estimate the
amount of
loss
contingencies. An estimated loss contingency is
accrued when it is probable that a liability has been
incurred or an asset has been impaired and the
loss can be reasonably estimated.
amount of
Accruals for
loss contingencies have not been
recorded during the past three years. The Company
regularly evaluates current information available to
determine whether such accruals should be made or
adjusted.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact
the Company are described in Part II, Item 8 —
“Financial Statements and Supplementary Data,”
Note 2 — Summary of Significant Accounting
Policies;
in the Notes to Consolidated Financial
Statements.
Item 7A.
Disclosures About Market Risk.
Quantitative and Qualitative
The Company is exposed to market risk from
changes in interest rates, and to a limited extent,
commodity prices and foreign currency exchange
rates. Market risk is measured as the potential
negative impact on earnings, cash flows or fair
values resulting from a hypothetical change in
interest rates, commodity prices or foreign currency
exchange rates over the next year. The Company
manages exposure to market risks at the corporate
level. The portfolio of interest-sensitive assets and
liabilities is monitored and adjusted to provide
liquidity necessary to satisfy anticipated short-term
needs. The Company’s risk management policies
allow the use of specified financial instruments for
hedging purposes only. Speculation on interest rates
or foreign currency rates is not permitted. The
Company does not consider any of
these risk
management activities to be material.
Interest Rate Risk
The Company is exposed to the impact of interest
rate changes on any outstanding indebtedness under
the revolving credit facility agreement and the term
loan agreement both of which have a variable
interest rate. The interest rate on advances under the
revolving credit facility varies based on the level of
borrowing. Rates range (a) between PNC Bank’s
base lending rate plus 0.5% to 1.0% or (b) between
the London Interbank Lending Rate (LIBOR) plus
1.5% to 2.0%. PNC Bank’s base lending rate was
3.25% at December 31, 2013 and would have
ranging between
permitted borrowing at
3.75% and 4.25%. The Company is required to pay
a monthly facility fee of 0.25% on any unused
amount under
the commitment based on daily
averages. At December 31, 2013, $16.3 million was
outstanding under the revolving credit facility, with
$1.3 million borrowed as base rate loans at an
interest rate of 3.75% and $15.0 million borrowed
as LIBOR loans at an interest rate of 1.67% and no
letters of credit were issued under the sub limit.
rates
The Company increased borrowing to $50.0 million
under the term loan on May 10, 2013. Monthly
principal payments of $0.6 million are required.
The unpaid balance of the term loan is due May 10,
2018. The interest rate on the term loan varies based
on the level of borrowing under the revolving credit
facility. Rates range (a) between PNC Bank’s base
lending rate plus 1.25% to 1.75% or (b) between the
London Interbank Lending Rate (LIBOR) plus
2.25% to 2.75%. At December 31, 2013, $45.8
million was outstanding under the term loan, with
$0.8 million borrowed as base rate loans at an
interest rate of 4.50% and $45.0 million borrowed
as LIBOR loans at an interest rate of 2.42%.
Foreign Currency Exchange Risk
The Company presently has very little exposure to
foreign currency risk. Less than 1% of sales are
demarcated in non-US dollar currencies, and
virtually all assets and liabilities of the Company
are denominated in US dollars. The Company is
proactively attempting to grow its international
business and the level of non-U.S. dollar revenues,
expenses, assets and liabilities is likely to grow
each year for the next several years. The Company
has historically performed no swaps and no foreign
currency hedges. The Company may utilize swaps
or foreign currency hedges in the future.
Commodity Risk
The Company is one of the largest processors of
citrus oils in the world, and therefore has a
in orange harvests. An
commodity risk inherent
unusual late-2013 freeze in California, combined
with insect-related harvest disruptions in Florida,
resulted in raw material feedstock price increases in
late-2013 and so far in 2014. The Company believes
that adequate global supply is available to meet the
Company’s needs
and the needs of general
chemistry markets at this time, and that we can pass
price increases along to our customers in the near
term. The Company presently does not have any
futures contracts and it does not plan to utilize these
in the foreseeable future.
43
Item 8.
Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders
Flotek Industries, Inc.
We have audited Flotek Industries, Inc.’s (the “Company”) internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 1992. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (c) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
limitations,
In our opinion, Flotek Industries, Inc. maintained in all material respects, effective internal control over financial
reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Flotek Industries, Inc. and subsidiaries as of December 31,
2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders’
equity and cash flows for each of the three years in the period ended December 31, 2013, and our report dated
February 10, 2014 expressed an unqualified opinion.
/s/ HEIN & ASSOCIATES LLP
Houston, Texas
February 10, 2014
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Stockholders
Flotek Industries, Inc.
We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc. and subsidiaries (the
“Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations,
comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2013. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Flotek Industries, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2013, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Flotek Industries, Inc. and subsidiaries’ internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 1992, and our report dated February 10,
2014 expressed an unqualified opinion on the effectiveness of Flotek Industries, Inc.’s internal control over
financial reporting.
/s/ HEIN & ASSOCIATES LLP
Houston, Texas
February 10, 2014
45
FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Current assets:
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $872 and $714 at
$
2,730
-
$
2,700
150
December 31,
2013
2012
December 31, 2013 and 2012, respectively
Inventories, net
Deferred tax assets, net
Other current assets
Total current assets
Property and equipment, net
Goodwill
Deferred tax assets, net
Other intangible assets, net
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Income taxes payable
Interest payable
Convertible senior notes, net of discount
Current portion of long-term debt
Total current liabilities
Long-term debt, less current portion
Deferred tax liabilities, net
Total liabilities
Commitments and contingencies
Stockholders’ equity:
65,016
63,132
2,522
4,261
137,661
79,114
66,271
15,012
77,523
42,259
45,177
1,274
4,654
96,214
56,499
26,943
16,045
24,166
$ 375,581
$ 219,867
$
19,899
12,778
3,361
111
-
26,415
62,564
35,690
27,575
125,829
$
22,373
6,503
3,479
114
5,133
4,329
41,931
22,455
751
65,137
Cumulative convertible preferred stock, $0.0001 par value,
100,000 shares authorized; no shares issued and outstanding
Common stock, $0.0001 par value, 80,000,000 shares authorized;
58,265,911 shares issued and 51,804,078 shares outstanding at
December 31, 2013; 53,123,978 shares issued and 49,601,495 shares
outstanding at December 31, 2012
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Treasury stock, at cost; 5,394,178 and 2,198,193 shares at December 31, 2013
and 2012, respectively
Total stockholders’ equity
-
-
6
266,122
(359)
(841)
(15,176)
249,752
5
195,485
(40)
(37,019)
(3,701)
154,730
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 375,581
$ 219,867
See accompanying Notes to Consolidated Financial Statements.
46
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenue
Cost of revenue
Gross margin
Expenses:
Selling, general and administrative
Depreciation and amortization
Research and development
Gain on disposal of long-lived assets
Total expenses
Income from operations
Other income (expense):
Loss on extinguishment of debt
Change in fair value of warrant liability
Interest expense
Other income (expense), net
Total other income (expense)
Income before income taxes
Income tax (expense) benefit
Net income
Accrued dividends and accretion of discount on preferred
stock
Net income attributable to common stockholders
Earnings per common share:
Basic earnings per common share
Diluted earnings per common share
Weighted average common shares:
Year ended December 31,
2012
2011
2013
$
371,065
223,538
147,527
$
312,828
181,209
131,619
$
258,785
152,965
105,820
78,197
7,273
3,752
(421)
88,801
58,726
-
-
(2,092)
316
(1,776)
56,950
(20,772)
36,178
-
36,178
0.70
0.67
66,415
4,410
3,182
(1,009)
72,998
58,621
(7,257)
2,649
(8,103)
(452)
(13,163)
45,458
4,333
49,791
-
49,791
1.03
0.97
50,612
3,983
2,337
-
56,932
48,888
(3,225)
9,571
(15,960)
(4)
(9,618)
39,270
(7,862)
31,408
(4,868)
26,540
0.60
0.56
$
$
$
$
$
$
$
$
$
Weighted average common shares used in computing basic
earnings per common share
51,346
48,185
44,229
Weighted average common shares used in computing
diluted earnings per common share
53,841
53,554
47,638
See accompanying Notes to Consolidated Financial Statements.
47
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year ended December 31,
2012
2011
2013
Net income
Other comprehensive income (loss):
$
36,178
$
49,791
$
31,408
Foreign currency translation adjustment
(319)
4
(141)
Comprehensive income
$
35,859
$
49,795
$
31,267
See accompanying Notes to Consolidated Financial Statements.
48
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common
Stock
Preferred Stock
Treasury
Stock
Shares
Issued
Par
Value Shares Value Shares
Cost
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
36,754 $ 4
-
-
-
-
-
3,665
11
-
-
-
$ 7,280
-
-
-
$
565
-
-
-
(892) $103,408
-
-
29,438
-
-
-
$ 97
-
(141)
-
$(113,350)
31,408
-
-
Total
$ (3,453)
31,408
(141)
29,438
Balance, December 31, 2010
Net income
Foreign currency translation adjustment
Sale of common stock, net of issuance cost
Common stock issued in payment of term
loan debt
Common stock issued in payment of
convertible notes
Accretion of discount on preferred stock
Common stock issued in payment of
preferred stock dividends
Preferred stock dividends, net of forfeitures
Stock warrants exercised
Stock options exercised
Restricted stock granted
Restricted stock forfeited
Treasury stock purchased
Excess tax benefit related to share-based
awards
Stock compensation expense
Conversion of preferred stock into common
stock
Return of borrowed shares under share
lending agreement
Balance, December 31, 2011
Net income
Foreign currency translation adjustment
Fair value of warrant liability reclassified to
additional paid-in capital
Stock warrants exercised
Stock options exercised
Restricted stock granted
Restricted stock forfeited
Treasury stock purchased
Excess tax benefit related to share-based
awards
Employee stock purchase plan
Stock compensation expense
Return of borrowed shares under share
lending agreement
Balance, December 31, 2012
Net income
Foreign currency translation adjustment
Issuance costs of preferred stock and
detachable warrants
Stock warrants exercised
Stock options exercised
Restricted stock granted
Restricted stock forfeited
Stock granted in incentive performance plan
Treasury stock purchased
Stock surrendered for exercise of stock
options
Excess tax benefit related to share-based
awards
Employee stock purchase plan
Stock compensation expense
Stock issued in Florida Chemical Company
acquisition
Return of borrowed shares under share
lending agreement
171
559
-
624
-
3,961
64
1,288
-
-
-
-
4,872
-
-
-
-
-
-
-
-
-
-
-
-
-
1
-
51,958 $ 5
-
-
-
-
-
348
68
750
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
53,124 $ 5
-
-
-
-
-
267
572
802
-
217
-
-
-
-
-
3,284
-
-
-
-
-
-
-
-
-
-
-
-
1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,925
-
-
-
-
-
-
-
-
-
(11)
(11,205)
-
-
-
-
-
-
-
-
11
81
-
-
-
-
701
- 1,358
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30
166
-
(15)
-
659
$
$
-
-
-
-
-
-
-
-
-
(775)
-
-
-
-
1,398
5,165
-
3,254
-
4,793
147
-
-
-
570
7,437
11,204
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,925)
-
(943)
-
-
-
-
-
-
-
-
-
1,398
5,165
-
3,254
(943)
4,793
147
-
-
(775)
570
7,437
-
-
$ (1,667) $166,814
-
-
-
-
$ (44)
-
4
$ (86,810)
49,791
-
$ 78,298
49,791
4
-
-
-
-
-
(2,034)
-
-
-
-
13,973
421
167
-
-
-
528
161
13,421
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
13,973
421
167
-
-
(2,034)
528
161
13,421
-
- 2,198
-
-
-
-
$ (3,701) $195,485
-
-
-
-
$ (40)
-
(319)
$ (37,019)
36,178
-
$154,730
36,178
(319)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
115
-
448
237
-
(44)
-
-
- 2,440
-
-
-
-
-
-
(7,568)
(3,907)
-
-
-
-
-
(200)
323
4,397
-
-
-
-
-
1,668
824
10,914
52,711
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(200)
323
4,397
-
-
-
(7,568)
(3,907)
1,668
824
10,914
52,712
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Balance, December 31, 2013
58,266 $ 6
$
- 5,394
$(15,176) $266,122
$(359)
$
(841)
$249,752
See accompanying Notes to Consolidated Financial Statements.
49
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2012
2011
2013
Cash flows from operating activities:
Net income
$
36,178
$
49,791
$
31,408
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in fair value of warrant liability
Depreciation and amortization
Amortization of deferred financing costs
Accretion of debt discount
Provision for doubtful accounts
Provision for inventory reserves and market adjustments
Gain on sale of assets
Stock compensation expense
Deferred income tax (benefit) provision
Excess in tax benefit related to share-based awards
Non-cash loss on extinguishment of debt
Changes in current assets and liabilities:
Restricted cash
Accounts receivable
Inventories
Other current assets
Accounts payable
Accrued liabilities
Income taxes payable
Interest payable
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of assets
Payments for acquisition, net of cash acquired
Purchase of patents and other intangible assets
Net cash used in investing activities
Cash flows from financing activities:
Repayments of indebtedness
Proceeds from borrowings
Borrowings on revolving credit facility
Repayments on revolving credit facility
Debt issuance costs
Issuance costs of preferred stock and detachable warrants
Excess tax benefit related to share-based awards
Purchase of treasury stock
Proceeds from sale of common stock
Proceeds from exercise of stock options
Proceeds from exercise of warrants
Net cash (used in) provided by financing activities
Effect of changes in exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
-
15,109
169
55
570
1,330
(4,565)
10,914
793
(1,668)
-
150
(9,862)
4,523
936
(21,326)
4,053
2,194
(5)
39,548
(15,007)
5,788
(53,396)
(85)
(62,700)
(13,206)
26,190
313,396
(297,124)
(1,293)
(200)
1,668
(7,568)
824
491
323
23,501
(319)
30
2,700
2,730
(2,649)
11,583
946
3,710
512
2,079
(4,819)
13,421
(18,746)
(528)
4,841
-
1,796
(9,368)
(2,073)
2,527
(1,894)
369
(1,983)
49,515
(20,701)
5,521
-
(20)
(15,200)
(102,438)
25,000
-
-
(106)
-
528
(2,034)
161
167
421
(78,301)
4
(43,982)
46,682
(9,571)
10,105
3,126
5,295
661
1,011
(3,378)
7,437
1,218
(570)
3,225
-
(17,918)
(11,054)
(892)
5,041
(255)
7,563
(29)
32,423
(9,984)
5,286
-
(244)
(4,942)
(33,273)
-
-
-
(1,421)
-
570
(775)
29,438
147
4,793
(521)
(141)
26,819
19,863
$
2,700
$
46,682
See accompanying Notes to Consolidated Financial Statements.
50
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”)
is a technology-driven, global developer and supplier
of drilling, completion and production technologies
and related services. With its acquisition of Florida
Chemical Company, Inc. on May 10, 2013 (see
Note 3), the Company expanded its energy specialty
chemical
technologies and added consumer and
industrial chemical technologies as a new segment
and product line.
“Company”), now includes
technologies, drilling and artificial
Flotek’s strategic focus, and that of its diversified
wholly-owned subsidiaries (collectively referred to as
energy related
the
chemical
lift
technologies, and consumer and industrial chemical
technologies. Within
the
Company provides oilfield specialty chemicals and
logistics, down-hole drilling tools and down-hole
production tools used in the energy and mining
industries. Flotek’s products and services enable
customers to drill wells more efficiently, to realize
increased production from both new and existing
wells and to decrease future well operating costs.
technologies,
energy
and gas
companies. Within
Major customers include leading oilfield service
providers, pressure-pumping service
companies,
onshore and offshore drilling contractors, and major
exploration and
and independent oil
consumer
production
and
industrial
the Company
provides products
the flavor and fragrance
industry and the industrial chemical industry. Major
customers include beverage and food companies,
fragrance
and companies providing
household and industrial cleaning products.
technologies,
companies,
chemical
for
The Company is headquartered in Houston, Texas,
with operating locations in Florida, Louisiana, New
Mexico, North Dakota, Oklahoma, Pennsylvania,
Texas, Utah, Wyoming and The Netherlands.
Flotek’s products are marketed both domestically and
internationally, with international presence and/or
initiatives in over 20 countries.
Flotek was initially incorporated under the laws of
the Province of British Columbia on May 17, 1985.
On October 23, 2001, Flotek changed its corporate
domicile to the state of Delaware.
Note 2 — Summary of Significant Accounting
Policies
Cash Equivalents
Accounting Principles
been
The Company’s consolidated financial statements
have
the
in
accounting principles generally accepted in the
United States of America (“GAAP”).
accordance with
prepared
Principles of Consolidation
The consolidated financial statements include the
accounts of Flotek Industries, Inc. and all wholly-
owned
significant
intercompany accounts and transactions have been
eliminated in consolidation. The Company does not
have investments in any unconsolidated subsidiaries.
corporations. All
subsidiary
Cash equivalents consist of highly liquid investments
with maturities of three months or less at the date of
purchase.
Cash Management
In January 2013,
the Company began using a
controlled disbursement account for its main cash
account. Under this system, outstanding checks can
be in excess of the cash balances at the bank before
the disbursement account is funded, creating a book
overdraft. Book overdrafts on this account are
presented as a current liability in accounts payable in
the consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable arise from product sales, product
rentals and services and are stated at estimated net
51
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the
value
incorporates
value. This
an
realizable
allowance for doubtful accounts to reflect any loss
anticipated on accounts receivable balances. The
Company regularly evaluates its accounts receivable
to estimate amounts that will not be collected and
appropriate provision for doubtful
records
accounts as a charge to operating expenses. The
allowance for doubtful accounts is based on a
combination of the age of the receivables, individual
and
customer
historical write-offs and collections. The Company
writes off specific accounts receivable when they are
determined to be uncollectible.
circumstances,
conditions
credit
the Company’s customers are
The majority of
engaged in the energy industry. The cyclical nature
of
the energy industry may affect customers’
operating performance and cash flows, which directly
impact
on
certain
outstanding
customers are located in international areas that are
inherently subject to risks of economic, political and
civil instability, which can impact the collectability
of receivables.
obligations. Additionally,
the Company’s
collect
ability
to
Changes in the allowance for doubtful accounts are as follows (in thousands):
Year ended December 31,
2012
2011
2013
Balance, beginning of year
Charged to provision for doubtful accounts
Write-offs
Balance, end of year
$
714
570
(412)
$
571
512
(369)
$
262
661
(352)
$
872
$
714
$
571
Inventories
Inventories consist of raw materials, work-in-process
and finished goods and are stated at the lower of cost,
determined using the weighted-average cost method,
or market. Finished goods inventories include raw
materials, direct labor and production overhead. The
Company regularly reviews inventories on hand and
records a provision for excess and obsolete inventory
based primarily on forecasts of product demand,
trends, market conditions, production or
historical
procurement
technological
developments and advancements.
requirements
and
Property and Equipment
Property and equipment are stated at cost. The cost of
is charged to
ordinary maintenance and repair
operating expense, while replacement of critical
components and major improvements are capitalized.
Depreciation or
amortization of property and
equipment, including assets held under capital leases,
52
is calculated using the straight-line method over the
asset’s estimated useful life:
Buildings and leasehold improvements
2-30 years
Machinery, equipment and rental tools
7-10 years
Furniture and fixtures
Transportation equipment
Computer equipment and software
3 years
2-5 years
3-7 years
changes
Indicative
events or
Property and equipment are reviewed for impairment
whenever
in circumstances
indicate the carrying value of an asset or asset group
events or
may not be recoverable.
circumstances include matters such as a significant
decline in market value or a significant change in
business climate. An impairment loss is recognized
when the carrying value of an asset exceeds the
estimated undiscounted future cash flows from the
use of the asset and its eventual disposition. The
amount of impairment loss recognized is the excess
of the asset’s carrying value over its fair value.
Assets to be disposed of are reported at the lower of
the carrying value or the fair value less cost to sell.
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the
Upon sale or other disposition of an asset,
Company recognizes a gain or loss on disposal
measured as the difference between the net carrying
value of the asset and the net proceeds received.
Internal Use Computer Software Costs
the
application
development
Direct costs incurred to purchase and develop
computer software for internal use are capitalized
and
during
implementation stages. These software costs have
been for enterprise-level business and finance
software that is customized to meet the Company’s
specific operational needs. Capitalized costs are
included in property and equipment and are
amortized on a straight-line basis over the estimated
life of the software beginning when the
useful
substantially complete and
software project
placed in service. Costs
incurred during the
preliminary project stage and costs for training, data
conversion and maintenance are expensed as
incurred.
is
The Company amortizes software costs using the
straight-line method over the expected life of the
software, generally 3 to 7 years. The unamortized
amount of capitalized software was $4.7 million at
December 31, 2013.
Goodwill
is
not
Goodwill is the excess of cost of an acquired entity
over the amounts assigned to identifiable assets
acquired and liabilities assumed in a business
combination. Goodwill
to
amortization, but is tested for impairment annually
during the fourth quarter, or more frequently if an
event occurs or circumstances change that would
indicate
These
circumstances may include an adverse change in the
business climate or a change in the assessment of
future operations of a reporting unit.
impairment.
potential
subject
a
a
assessments.
assesses whether
exists using both qualitative
goodwill
The Company
and
impairment
quantitative
qualitative
assessment involves determining whether events or
circumstances exist that indicate it is more likely
than not that the fair value of a reporting unit is less
than its carrying amount, including goodwill. If,
The
on
this
qualitative
assessment,
is
based
determined that it is not more likely than not that
the fair value of a reporting unit is less than its
carrying amount, the Company does not perform a
quantitative assessment.
it
If the qualitative assessment indicates that it is more
likely than not that the fair value of a reporting unit
is less than its carrying amount or if the Company
elects not to perform a qualitative assessment, a
quantitative assessment or two-step impairment test
is performed to determine whether goodwill
impairment exists at the reporting unit.
approach
considers
The first step is to compare the estimated fair value
of each reporting unit with goodwill to its carrying
including goodwill. To determine fair
amount,
the Company uses the income
value estimates,
approach based on discounted cash flow analyses,
combined with a market-based approach. The
market-based
valuation
comparisons of recent public sale transactions of
and earnings multiples of
similar businesses
publicly traded businesses operating in industries
consistent with the reporting unit. If the fair value
of a reporting unit is less than its carrying amount,
the second step of the impairment test is performed
to determine the amount of impairment loss, if any.
The second step compares the implied fair value of
the reporting unit goodwill with the carrying
amount of that goodwill. If the carrying amount of
the reporting unit’s goodwill exceeds its implied
fair value, an impairment loss is recognized in an
amount equal to that excess.
Other Intangible Assets
The Company’s other intangible assets have finite
and indefinite lives and consist of customer
trademarks and brand names and
relationships,
purchased patents.
The cost of intangible assets with finite lives is
amortized using the straight-line method over the
estimated period of economic benefit, ranging from
2 to 20 years. Asset lives are adjusted whenever
there is a change in the estimated period of
economic benefit. No residual value has been
assigned to these intangible assets.
53
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
or
events
changes
Intangible assets with finite lives are tested for
impairment whenever
in
circumstances indicate the carrying value may not
be recoverable. These conditions may include a
change in the extent or manner in which the asset is
being used or a change in future operations. The
Company assesses the recoverability of the carrying
amount by preparing estimates of future revenue,
margins and cash flows. If the sum of expected
(undiscounted and without
future
interest charges) is less than the carrying amount,
an impairment loss is recognized. The impairment
loss recognized is the amount by which the carrying
amount exceeds the fair value. Fair value of these
assets may be determined by a variety of
methodologies,
including discounted cash flow
models.
cash flows
to
are
but
tested
amortization,
Intangible assets with indefinite lives are not
subject
for
impairment annually during the fourth quarter, or
more frequently if an event occurs or circumstances
change that would indicate a potential impairment.
These circumstances may include, but are not
limited to, a significant adverse change in the
business climate, unanticipated competition, or a
results of a
change in projected operations or
reporting unit.
The Company assesses whether an indefinite lived
intangible impairment exists using both qualitative
and quantitative
assessments. The qualitative
assessment involves determining whether events or
circumstances exist that indicate it is more likely
than not that the fair value of the indefinite lived
intangible is less than its carrying amount. If, based
on this qualitative assessment, it is determined that
it is not more likely than not that the fair value of
the indefinite lived intangible is less than its
carrying amount, the Company does not perform a
quantitative assessment.
If the qualitative assessment indicates that it is more
likely than not that the indefinite-lived intangible
asset is impaired or if the Company elects to not
perform a qualitative assessment, the Company then
performs the quantitative impairment
test. The
quantitative impairment test for an indefinite-lived
intangible asset consists of a comparison of the fair
54
value of the asset with its carrying amount. If the
carrying amount of an intangible asset exceeds its
fair value, an impairment loss is recognized in an
amount equal to that excess. Fair value of these
assets may be determined by a variety of
methodologies, including discounted cash flows.
Warrant Liability
Prior to June 2012, the Company used the Black-
Scholes option-pricing model to estimate the fair
value of its warrant liability. On June 14, 2012,
provisions in the Company’s outstanding warrants
were amended to eliminate anti-dilution price
adjustment provisions and remove cash settlement
provisions in the event of a change of control. Upon
amendment, the warrants met the requirements for
classification as equity. All fluctuations in the fair
value of the warrant liability prior to June 2012
were recognized as non-cash income or expense
items within the statement of operations. The fair
value accounting methodology for
the warrant
liability is no longer required.
Business Combinations
Acquisitions are accounted for by applying the
acquisition method. Identifiable assets acquired and
liabilities assumed are recorded at fair value at the
acquisition date. Costs
the
acquisition are recognized as expenses as incurred.
incurred to affect
Fair Value Measurements
The Company categorizes
financial assets and
liabilities using a three-tier fair value hierarchy, based
on the nature of the inputs used to determine fair
value. Inputs refer broadly to assumptions market
participants would use to value an asset or liability and
may be observable or unobservable. The hierarchy
gives the highest priority to quoted prices in active
markets for identical assets or liabilities (level 1) and
the lowest priority to unobservable inputs (level 3).
“Level 1” measurements are measurements using
quoted prices in active markets for identical assets and
liabilities. “Level 2” measurements are measurements
using quoted prices in markets that are not active or
that are based on quoted prices for similar assets or
liabilities. “Level 3” measurements are measurements
that use significant unobservable inputs which require
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
a company to develop its own assumptions. When
determining the fair value of assets and liabilities, the
Company uses
reliable measurement
available.
the most
Revenue Recognition
sales
for product
and services
Revenue
is
recognized when all of the following criteria have
been met: (i) persuasive evidence of an arrangement
exists, (ii) products are shipped or services rendered
to the customer and significant risks and rewards of
ownership have passed to the customer, (iii) the
price to the customer is fixed and determinable and
(iv) collectability is reasonably assured. Products
and services are sold with fixed or determinable
prices and do not include right of return provisions
significant post-delivery obligations.
or other
Deposits and other funds received in advance of
delivery are deferred until the transfer of ownership
is complete. Shipping and handling costs are
reflected in cost of revenue. Taxes collected are not
included in revenue, rather taxes are accrued for
future remittance to governmental authorities.
the
under
The Logistics division of chemicals recognizes
revenue from design and construction oversight
contracts
percentage-of-completion
method of accounting, measured by the percentage
of “costs incurred to date” to the “total estimated
costs of completion.” This percentage is applied to
the “total estimated revenue at completion” to
calculate proportionate revenue earned to date.
Contracts for services are inclusive of direct labor
indirect costs of
and material costs, as well as,
operations. General and administrative costs are
charged to expense as incurred. Changes in job
performance metrics and estimated profitability,
including contract bonus or penalty provisions and
final contract settlements, are recognized in the
period such revisions appear probable. Known or
anticipated losses on contracts are recognized in full
when amounts are probable and estimable. Bulk
material loading revenue is recognized as services
are performed.
Drilling revenue is recognized upon receipt of a
from the
signed and dated field billing ticket
customer. Customers are charged contractually
55
for oilfield rental equipment
agreed amounts
damaged or lost-in-hole (“LIH”). LIH proceeds are
recognized as revenue and the associated carrying
value is charged to cost of sales. LIH revenue
totaled $5.9 million, $4.2 million and $4.5 million
for the years ended December 31, 2013, 2012 and
2011, respectively.
The Company generally is not
contractually
obligated to accept returns, except for defective
products. Typically products determined to be
defective are replaced or the customer is issued a
credit memo. Based on historical return rates, no
provision is made for returns at the time of sale. All
costs associated with product returns are expensed
as incurred.
Foreign Currency Translation
currency of
foreign subsidiaries are
Financial statements of
prepared using the
the primary
economic environment of the foreign subsidiaries,
as the functional currency. Assets and liabilities of
foreign subsidiaries are translated into U.S. dollars
at exchange rates in effect as of the end of identified
reporting
expense
average
transactions
monthly exchange rate for the reporting period.
Resultant translation adjustments are recognized as
other
(loss) within
stockholders’ equity.
translated using the
periods.
are
comprehensive
Revenue
income
and
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all
changes in stockholders’ equity except those arising
from investments
to
stockholders. The Company’s
comprehensive
income and foreign
income (loss)
currency translation adjustments.
and distributions
includes net
from,
Research and Development Costs
Expenditures for
research activities relating to
product development and improvement are charged
to expense as incurred.
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company has two U.S. tax filing groups which
file separate U.S. Federal
tax returns. Taxable
income of one return cannot be offset by tax
including net operating losses, of the
attributes,
other return.
are
tax
future
recognized for
The Company uses
liability method in
the
accounting for income taxes. Deferred tax assets
and liabilities
temporary
differences between financial statement carrying
amounts and the tax bases of assets and liabilities,
and are measured using the tax rates expected to be
in effect when the differences reverse. Deferred tax
assets and liabilities are recognized related to the
anticipated
temporary
differences between the financial statement basis
and the tax basis of the Company’s assets and
liabilities using statutory tax rates at the applicable
year end. Deferred tax assets are also recognized for
operating loss and tax credit carry forwards. The
effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of
operations in the period that includes the enactment
date. A valuation allowance is used to reduce
exists
tax
deferred
regarding their realization.
assets when
uncertainty
effects
of
A valuation allowance is
recorded to reduce
previously recorded tax assets when it becomes
more-likely-than-not that such assets will not be
realized. The Company evaluates, at least annually,
net operating loss carry forwards and other net
deferred tax assets and considers all available
evidence, both positive and negative, to determine
whether a valuation allowance is necessary relative
to net operating loss carry forwards and other net
deferred tax assets. In making this determination,
the Company considers cumulative losses in recent
years
evidence. The
Company considers recent years to mean the
current year plus the two preceding years. The
Company considers the recent cumulative income
or loss position of its filings groups as objectively
verifiable evidence for the projection of future
income, which consists primarily of determining the
average of the pre-tax income of the current and
prior two years after adjusting for certain items not
significant
negative
as
indicative of future performance. Based on this
analysis,
the Company determines whether a
valuation allowance is necessary.
income taxes are not provided on
U.S. Federal
subsidiaries operating
unremitted earnings of
outside the U.S. because it
is the Company’s
intention to permanently reinvest undistributed
earnings in the subsidiary. These earnings would
become subject to income tax if they were remitted
loaned to a U.S.
as dividends or
affiliate.
the amount of unrecognized
Determination of
deferred U.S.
tax liability on these
unremitted earnings is not practicable.
income
The Company has performed an evaluation and
concluded that there are no significant uncertain tax
positions requiring recognition in the Company’s
financial statements.
The Company’s policy is to record interest and
penalties related to income tax matters as income
tax expense.
Earnings Per Share
to
net
income
available
attributable
Basic earnings per common share is calculated by
dividing
common
stockholders by the weighted average number of
common shares outstanding for the period. Diluted
earnings per share is calculated by dividing net
income
to common stockholders,
adjusted for the effect of assumed conversions of
convertible notes and preferred stock, by the
weighted average number of common shares
outstanding, including potentially dilutive common
share
is dilutive.
Potentially dilutive common shares equivalents
consist of incremental shares of common stock
issuable upon exercise of
stock options and
warrants, settlement of restricted stock units, and
conversion
and
of
convertible preferred stock.
equivalents,
convertible
senior
effect
notes
the
if
Debt Issuance Costs
Costs related to debt issuance are capitalized and
amortized as interest expense over the term of the
related debt using the straight-line method, which
56
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
approximates the effective interest method. Upon
the repayment of debt, the Company accelerates the
recognition of an appropriate amount of the costs as
interest expense.
Capitalization of Interest
are
in progress,
and expenditures
Interest costs are capitalized for qualifying in-process
software development projects. Capitalization of
interest commences when activities to prepare the
asset
and
borrowing costs are being incurred. Interest costs are
capitalized until
their
intended use. Capitalized interest is added to the cost
of the underlying assets and amortized over the
estimated useful lives of the assets. During the year
ended December 31, 2012, $0.1 million of interest
was capitalized.
the assets are ready for
Stock-Based Compensation
fair
Stock-based compensation expense for share-based
payments, related to stock option and restricted
stock awards, is recognized based on their grant-
date
recognizes
values. The Company
compensation expense, net of estimated forfeitures,
on a straight-line basis over the requisite service
period of the award. Estimated forfeitures are based
on historical experience.
Use of Estimates
of
assets
financial
statements
preparation
and liabilities
in
The
conformity with GAAP requires management
to
make estimates and assumptions that affect reported
amounts of assets and liabilities, disclosure of
contingent
and reported
amounts of revenue and expenses. Actual results
could differ from these estimates. Significant items
subject
include
to estimates and assumptions
application of the percentage-of-completion method
of revenue recognition, the carrying amount and
and
useful
impairment assessments, share-
intangible assets,
based
valuation
allowances for accounts receivable, inventories, and
deferred tax assets.
lives of property and equipment
compensation
expense
and
Reclassifications
Certain prior year amounts have been reclassified to
conform to the current year presentation. The
reclassifications did not impact net income.
New Accounting Pronouncements
(a) Application of New Accounting Standards
Effective January 1, 2013, the Company adopted
the accounting guidance in Accounting Standards
Update (“ASU”) No. 2012-02, “Testing Indefinite-
Lived Intangible Assets for Impairment,” which
perform qualitative
company
permits
to
a
assessments
an
likelihood that
regarding the
indefinite-lived intangible asset
is impaired and
the need to perform a
subsequently assess
quantitative
test. The Company
followed this guidance for its annual impairment
testing of indefinite-lived intangible assets during
the fourth quarter of 2013. Implementation of this
standard did not have a material effect on the
consolidated financial statements.
impairment
of
Out
guidance
Accumulated
in ASU No.
Effective January 1, 2013, the Company adopted the
2013-02,
accounting
“Comprehensive Income: Reporting of Amounts
Reclassified
Other
Comprehensive Income,” which provides accounting
guidance on the reporting of reclassifications out of
accumulated other comprehensive income. The
guidance requires an entity to present, either on the
face of the statement where net income is presented
or in the notes, significant amounts reclassified out of
accumulated other comprehensive income by the
respective line items of net income if the amount is
reclassified to net income in its entirety in the same
reporting period. For other amounts not required to
be reclassified in their entirety to net income in the
same reporting period, a cross reference to other
disclosures that provide additional detail about the
reclassification amounts is required. Implementation
of this standard did not have a material effect on the
consolidated financial statements.
57
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(b) New Accounting Requirements and Disclosures
In July 2013, the Financial Accounting Standards
Board issued ASU No. 2013-11, “Presentation of an
Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax
Credit Carryforward Exists,” which updated the
guidance in ASC Topic 740, Income Taxes. The
amendments in ASU 2013-11 provide guidance for
the presentation of unrecognized tax benefits when a
net operating loss carryforward, a similar tax loss, or
a tax credit carryforward exists at the reporting date.
The guidance requires an unrecognized tax benefit to
be presented as a decrease in a deferred tax asset
where a net operating loss, a similar tax loss, or a tax
credit carryforward exists and certain criteria are met.
This guidance is effective January 1, 2014. The
Company is currently evaluating this guidance and
does not expect that adoption will have a material
effect on the consolidated financial statements.
Note 3 — Acquisition of Florida Chemical Company, Inc.
On May 10, 2013, the Company acquired Florida
Chemical Company, Inc. (“Florida Chemical”), the
world’s largest processor of citrus oils and a pioneer
synthesis, and flavor and
in solvent, chemical
fragrance applications
from citrus oils. Florida
Chemical has been an innovator in creating high
performance, bio-based products for a variety of
industries, including applications in the oil and gas
industry. The acquisition brings a portfolio of high
performance renewable and sustainable chemistries
that perform well in the oil and gas industry as well
as non-energy related markets. This expands the
Company’s business into consumer and industrial
chemical technologies which provide products for the
flavor and fragrance industry and the specialty
chemical industry. These technologies are used by
beverage and food companies, fragrance companies,
and companies providing household and industrial
cleaning products.
The Company acquired 100% of the outstanding
shares of Florida Chemical’s common stock. The
purchase consideration transferred is as follows (in
thousands):
Cash
Common stock (3,284,180 shares)
Repayment of debt
Total purchase price
$ 49,500
52,711
4,227
$ 106,438
The allocation of the purchase consideration was
based upon the estimated fair value of the tangible
and identifiable intangible assets acquired and
liabilities assumed in the acquisition. The allocation
58
was made to major categories of assets and liabilities
based on management’s best estimates, supported by
independent third-party analyses. The excess of the
the estimated fair value of
purchase price over
tangible and identifiable intangible assets acquired,
and liabilities assumed was allocated to goodwill.
The allocation of purchase consideration is as follows
(in thousands):
Cash
Net working capital, net of cash
Property and equipment:
Personal property
Real property
Other assets
Other intangible assets:
Customer relationships
Trade names
Proprietary technology
Goodwill
Deferred tax impact of valuation
adjustment
$
331
15,574
13,400
6,750
205
29,270
12,670
14,080
39,328
(25,170)
Total purchase price allocation
$ 106,438
following
unaudited pro forma
The
financial
information presents results of operations as if the
acquisition had occurred as of January 1, 2012. This
financial information does not purport to represent
the results of operations which would actually have
been obtained had the acquisition been completed as
of January 1, 2012, or the results of operations that
may be obtained in the future. Also, this financial
the cost of any
information does not
reflect
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
integration activities or benefits from the merger and
synergies that may be derived from any integration
activities, both of which may have a material effect
on the consolidated results of operations in the
periods following the completion of the merger.
Pro forma financial information is as follows (in thousands, except per share data):
Revenue
Net income
Earnings per common share:
Basic
Diluted
Year ended December 31,
2013
395,407
38,271
0.73
0.70
$
$
$
2012
391,786
53,902
1.05
0.98
$
$
$
Pro forma adjustments include, but are not limited to,
adjustments for amortization expense for acquired
finite lived intangible assets, depreciation expense for
the fair value of acquired property and equipment,
interest expense for increased long-term debt and
revolving credit facility borrowings required for the
acquisition, and income tax expense on Florida
Chemical income before income taxes. In addition,
pro
historical
amortization, depreciation, and interest expense from
the pro forma results of operations.
adjustments
eliminate
forma
to
are
cover
established
$10 million was
the
indemnification obligations of Florida Chemical
Florida Chemical’s
stockholders. Results
of
operations
the Company’s
in
included
consolidated financial statements from the date of
acquisition, May
2013. The Company’s
consolidated statements of operations for the year
ended December 31, 2013 include $50.9 million of
revenue,
from
operations,
related to the operations of Florida
Chemical.
and $10.0 million of
income
10,
The acquisition was financed through increased long
term debt of $25 million, additional borrowings on
the Company’s revolving credit facility of $28.7
million and the issuance of 3.3 million shares of the
Company’s common stock. An escrow fund totaling
The Company incurred $1.4 million of acquisition
costs in connection with the transaction which have
been expensed as incurred and included in selling,
general and administrative expenses.
59
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
Year ended December 31,
2012
2013
2011
Supplemental non-cash investing and financing activities:
Value of shares issued in acquisition of Florida Chemical
Fair value of warrant liability reclassified to additional
paid-in capital
Value exchanged in conversion of preferred stock to common stock
Value of common stock issued in payment of convertible notes
Value of common stock issued in payment of preferred
stock dividends
Value of common stock issued in payment of term loan debt
Equipment acquired through capital leases
Exercise of stock options by common stock surrender
Supplemental cash payment information:
Interest paid
Income taxes paid (refunded)
Note 5 — Revenue
$ 52,711
$
-
$
-
-
-
-
-
-
754
3,907
13,973
-
-
-
-
1,263
-
-
11,205
5,165
3,254
1,398
1,334
-
$ 1,859
17,783
$ 5,521
14,049
$ 7,627
(904)
The Company differentiates revenue and cost of revenue based on whether the source of revenue is attributable to
products, rentals or services. Revenue and cost of revenue by source are as follows (in thousands):
Revenue:
Products
Rentals
Services
Cost of Revenue:
Products
Rentals
Services
Depreciation
Year ended December 31,
2012
2011
2013
$
282,639
62,042
26,384
$
224,777
67,938
20,113
$
181,417
63,610
13,758
$
371,065
$
312,828
$
258,785
$
180,800
24,987
9,916
7,835
$
135,367
30,618
8,051
7,173
$
115,875
25,971
4,997
6,122
$
223,538
$
181,209
$
152,965
60
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Inventories
Inventories are as follows (in thousands):
Raw materials
Work-in-process
Finished goods
Inventories
Less reserve for excess and obsolete inventory
Inventories, net
December 31,
2013
2012
$13,953
1,904
50,019
65,876
(2,744)
$12,883
342
34,704
47,929
(2,752)
$63,132
$45,177
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
Balance, beginning of year
Charged to costs and expenses
Deductions
Balance, end of the year
Year ended December 31,
2012
2013
2011
$ 2,752
1,330
(1,338)
$ 2,744
$2,679
882
(809)
$2,752
$2,633
1,011
(965)
$2,679
At December 31, 2012, the Company recorded a $1.2 million write-down for inventory with a current market
value less than its cost.
Note 7 — Property and Equipment
Property and equipment are as follows (in thousands):
Land
Buildings and leasehold improvements
Machinery, equipment and rental tools
Equipment in progress
Furniture and fixtures
Transportation equipment
Computer equipment and software
Property and equipment
Less accumulated depreciation
Property and equipment, net
December 31
2013
2012
$
5,088
32,269
71,073
4,601
2,400
6,340
7,617
129,388
(50,274)
$ 79,114
$ 1,442
18,520
54,279
9,382
1,358
5,136
6,743
96,860
(40,361)
$ 56,499
Depreciation expense, including expense recorded in cost of revenue, totaled $11.2 million, $9.5 million and $8.0
million for the years ended December 31, 2013, 2012 and 2011, respectively.
During 2013, 2012 and 2011, no impairment was recognized related to property and equipment.
61
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Goodwill
Prior to the acquisition of Florida Chemical,
the
Company had four reporting units, Energy Chemical
Technologies, Drilling Tools, Teledrift, and Artificial
Lift Technologies, of which only two, Energy
Chemical Technologies and Teledrift, had an existing
goodwill balance. For segment reporting purposes,
the Teledrift reporting unit is consolidated within the
Drilling Technologies segment.
During May 2013, as a result of the Florida Chemical
acquisition, the Company recognized $39.3 million
of goodwill. During the fair value assessment
process,
the Company identified two separate
reporting units, one of which was consolidated within
the Energy Chemical Technologies segment and the
other was identified as the Consumer and Industrial
Chemical Technologies reporting unit and segment.
The Company recognized $18.7 million of additional
goodwill within the Energy Chemical Technologies
reporting unit and $20.6 million of goodwill within
the Consumer and Industrial Chemical Technologies
reporting unit. This addition to goodwill will not be
deductible for income tax purposes.
Goodwill is tested for impairment annually in the
fourth quarter, or more frequently if circumstances
indicate a potential
impairment. During annual
goodwill impairment testing in 2013, 2012 and 2011,
the Company first assessed qualitative factors to
determine whether it was necessary to perform the
two-step goodwill impairment test that the Company
has historically used. The Company concluded that it
was not more-likely-than-not
that goodwill was
impaired as of the fourth quarter of each year, and
therefore, further testing was not required.
Changes in the carrying value of goodwill for each reporting unit are as follows (in thousands):
Energy
Chemical
Technologies
Consumer and
Industrial
Chemical
Technologies
Downhole
Tools
TeledriftTM
Artificial Lift
Technologies
Total
$
43,009 $
(43,009)
46,396
(31,063)
$
5,861
(5,861)
$
106,876
(79,933)
-
-
43,009
(43,009)
-
-
-
15,333
-
46,396
(31,063)
15,333
-
-
-
-
5,861
(5,861)
-
-
-
26,943
-
106,876
(79,933)
26,943
-
39,328
$
11,610
-
11,610
-
11,610
-
11,610
-
-
-
-
-
-
-
-
-
18,686
20,642
Balance at December 31, 2011:
Goodwill
Accumulated impairment losses
$
Goodwill balance, net
Activity during the year 2012:
Goodwill impairment
recognized
Balance at December 31, 2012:
Goodwill
Accumulated impairment losses
Goodwill balance, net
Activity during the year 2013:
Goodwill impairment
recognized
Acquisition goodwill
recognized
Balance at December 31, 2013:
Goodwill
Accumulated impairment losses
30,296
-
20,642
-
43,009
(43,009)
46,396
(31,063)
5,861
(5,861)
146,204
(79,933)
Goodwill balance, net
$
30,296
$
20,642
$
-
$
15,333
$
-
$
66,271
62
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Other Intangible Assets
Other intangible assets are as follows (in thousands):
Finite lived intangible assets:
Patents and technology
Customer lists
Non-compete agreements
Trademarks and brand names
Other
Total finite lived intangible assets acquired
Deferred financing costs
December 31,
2013
2012
Cost
Accumulated
Amortization
Cost
Accumulated
Amortization
$18,996
52,607
-
7,191
191
78,985
1,392
$
3,244
9,018
-
2,053
-
14,315
169
$
4,314
23,337
402
6,151
915
35,119
1,290
$
1,654
6,688
402
1,513
801
11,058
1,185
Total amortizable intangible assets
80,377
$
14,484
36,409
$
12,243
Indefinite lived intangible assets:
Trademarks and brand names
Total other intangible assets
Carrying value:
11,630
$92,007
-
$
36,409
Other intangible assets, net
$77,523
$
24,166
With the acquisition of Florida Chemical on May 10,
2013, the Company recorded increases in finite lived
intangible assets of $14.1 million in patents and
technology, $29.3 million in customer lists and $1.0
million in trademarks and brand names. In addition,
the Company recorded $11.6 million in indefinite
lived trademarks and brand names. These acquired
intangible assets were recorded at fair value as of the
date of acquisition.
Intangible assets acquired are amortized on a
straight-line basis over two to 20 years. Amortization
of intangible assets acquired totaled $3.9 million,
$2.1 million and $2.1 million for the years end ended
December 31, 2013, 2012 and 2011, respectively.
Amortization of deferred financing costs totaled $0.2
million, $0.9 million, and $3.1 million for the years
ended December 31, 2013, 2012 and 2011,
respectively. During 2013 and 2012,
the carrying
value of deferred financing costs was reduced by less
than $0.1 million and $1.8 million, respectively, upon
the Company’s convertible senior
repayments of
notes.
63
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Estimated future amortization expense for intangible assets, including deferred financing costs, at December 31,
2013 is as follows (in thousands):
Year ending December 31,
2014
2015
2016
2017
2018
Thereafter
Other intangible assets, net
$
4,972
4,935
4,704
4,549
4,302
42,431
$
65,893
During 2013, 2012 and 2011, no impairment was recognized related to other intangible assets.
Note 10 — Convertible Notes, Long-Term Debt and Credit Facility
Convertible notes and long-term debt are as follows (in thousands):
Convertible notes:
Convertible senior unsecured notes (2008 Notes)
Less discount on notes
Convertible senior notes reported as current, net of discount
Long-term debt:
Term loan
Revolving credit facility
Capital lease obligations
Total long-term debt
Less current portion of long-term debt
Long-term debt, less current portion
December 31,
2013
2012
$
$
-
-
-
$ 5,188
(55)
$ 5,133
$ 45,833
$25,000
16,272
-
-
1,784
62,105
26,784
(26,415)
(4,329)
$ 35,690
$22,455
Credit Facility
(the “Borrowers”)
On May 10, 2013, the Company and certain of its
subsidiaries
entered into an
Amended and Restated Revolving Credit, Term Loan
and Security Agreement (the “Credit Facility”) with
PNC Bank, National Association (“PNC Bank”). The
Company may borrow under the Credit Facility for
working capital, permitted acquisitions,
capital
expenditures and other corporate purposes. Under
terms of
the Credit Facility, as amended on
December 31, 2013, the Company (a) may borrow up
to $75 million under a revolving credit facility and
(b) has borrowed $50 million under a term loan.
64
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Credit
Facility
contains
inventory,
receivable,
The Credit Facility is secured by substantially all of
the Company’s domestic real and personal property,
including accounts
land,
buildings, equipment and other intangible assets.
The
customary
representations, warranties, and both affirmative
and negative covenants,
including a financial
covenant to maintain consolidated earnings before
interest,
amortization
ratio of 1.10 to 1.00, a
(“EBITDA”)
financial covenant to maintain a ratio of funded
debt to adjusted EBITDA of not greater than 4.0 to
1.0, and an annual limit on capital expenditures of
approximately $36 million. The Credit Facility
restricts the payment of cash dividends on common
stock. In the event of default, PNC Bank may
accelerate the maturity date of any outstanding
amounts borrowed under the Credit Facility.
depreciation
to debt
taxes,
and
The Credit Facility includes a provision that 25% of
EBITDA minus cash paid for taxes, dividends, debt
payments and unfunded capital expenditures, not to
exceed $3.0 million for any year, be paid within 60
days of the fiscal year end. For the year ended
December 31, 2013, the excess cash flow exceeded
$3.0 million. Consequently,
the Company will
prepay $3.0 million on its term loan balance to PNC
Bank by March 3, 2014. This amount is classified
as current debt at December 31, 2013.
Each of the Company’s domestic subsidiaries is
fully obligated for Credit Facility indebtedness as a
Borrower or as a guarantor.
(a) Revolving Credit Facility
Under the revolving credit facility, the Company
may borrow up to $75 million through May 10,
2018. This includes a sublimit of $10 million that
may be used for letters of credit. The revolving
credit facility is secured by substantially all the
Company’s domestic
and
inventory.
receivable
accounts
At December 31, 2013, eligible accounts receivable
and inventory securing the revolving credit facility
provided
$71.9
of
million under the revolving credit facility.
approximately
availability
65
The interest rate on advances under the revolving
credit
facility varies based on the level of
borrowing. Rates range (a) between PNC Bank’s
base lending rate plus 0.5% to 1.0% or (b) between
the London Interbank Lending Rate (LIBOR) plus
1.5% to 2.0%. PNC Bank’s base lending rate was
3.25% at December 31, 2013. The Company is
required to pay a monthly facility fee of 0.25% on
any unused amount under the commitment based on
daily averages. At December 31, 2013, $16.3
million was outstanding under the revolving credit
facility, with $1.3 million borrowed as base rate
loans at an interest rate of 3.75% and $15.0 million
rate
borrowed as LIBOR loans at an interest
of 1.67%.
Borrowing under the revolving credit agreement is
classified as current debt as a result of the required
lockbox
subjective
acceleration clause.
arrangement
and
the
(b) Term Loan
The Company increased borrowing to $50 million
under the term loan on May 10, 2013. Monthly
principal payments of $0.6 million are required.
The unpaid balance of the term loan is due on
May 10, 2018. Prepayments are permitted, and may
be required in certain circumstances. Amounts
repaid under the term loan may not be reborrowed.
The term loan is secured by substantially all of the
Company’s domestic land, buildings, equipment
and other intangible assets.
Based on a PNC Bank appraisal as of December 31,
2013, 85% of the net orderly liquidation value of
pledged equipment was $18.3 million less than the
principal amount of the term loan. This deficiency
is not required to be repaid while the pledged
equipment is being reappraised. In addition, PNC
Bank is
lien on the Company’s
domestic land and buildings and will include 75%
of their fair market value to support the outstanding
principal amount of the term loan. The Company’s
management believes the value resulting from the
reappraisal of the equipment and the addition of
land
the
support
outstanding principal amount of the term loan.
buildings will
securing its
fully
and
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The interest rate on the term loan varies based on
the level of borrowing under the revolving credit
facility. Rates range (a) between PNC Bank’s base
lending rate plus 1.25% to 1.75% or (b) between
LIBOR plus 2.25% to 2.75%. At December 31,
2013, $45.8 million was outstanding under the term
loan, with $0.8 million borrowed as base rate loans
at an interest rate of 4.50% and $45.0 million
borrowed as LIBOR loans at an interest
rate
of 2.42%.
Convertible Notes
The Company’s convertible notes have consisted of
Convertible Senior Unsecured Notes
(“2008
Notes”) and Convertible Senior Secured Notes
(“2010 Notes”). On February 15, 2013,
the
Company repurchased the remaining $5.2 million
2008 Notes. Following
of
this
repurchase,
the Company no longer has any
outstanding convertible senior notes.
outstanding
In February 2008, the Company issued the 2008
Notes at par, in an aggregate principal amount of
$115 million. The 2008 Notes had an interest rate of
5.25% and a scheduled maturity on February 15,
2028. The Company accounted for both the liability
and equity components of the 2008 Notes using the
Company’s nonconvertible debt borrowing rate of
11.5%. The Company used a five-year expected
term for accretion of the associated debt discount
which represented the period from inception until
contractual call/put options contained in the 2008
Notes became exercisable on February 15, 2013.
The Company assumed an effective tax rate of 38%.
At the date of issuance, the discount on the 2008
Notes was $27.8 million, with an associated
deferred tax liability of $10.6 million.
In March 2010,
the Company exchanged $40
million of 2008 Notes for aggregate consideration
of $36 million of 2010 Notes and $2 million worth
of shares of the Company’s common stock. The
transaction was accounted for as an exchange of
debt. Accordingly, no gain or loss was recognized
and the difference between the debt exchanged and
the net carrying value of the debt was recorded as a
reduction of previously recognized debt discount.
The remaining debt discount continued to be
accreted over the same period, at an assumed rate of
9.9%, using the effective interest method. The
Company capitalized commitment fees related to
the Exchange Agreement that were amortized using
the effective interest method over the period the
remain
convertible
outstanding.
debt was
expected
to
The 2010 Notes carried the same maturity date,
interest rate, conversion rights, conversion rate,
redemption rights and guarantees as the 2008 Notes.
The only difference in terms was that the 2010
Notes were secured by a second priority lien on
substantially all of the Company’s assets, while the
2008 Notes remained unsecured.
all, or
The convertible notes had a scheduled maturity on
February 15, 2028. On or after February 15, 2013,
the Company could redeem, for cash, all or a
portion of the convertible notes at a price equal to
100% of the outstanding principal amount, plus any
associated accrued and unpaid interest. Holders of
the convertible notes could require the Company to
purchase
the holder’s
outstanding notes on each of February 15,
2013, February 15, 2018, and February 15, 2023.
The convertible notes were convertible into shares
of the Company’s common stock at the option of
the note holders, subject
to certain contractual
conditions. The conversion rate was 43.9560 shares
to a
per $1,000 principal note amount
conversion price of approximately $22.75 per
share).
a portion, of
(equal
In May 2011, note holders exchanged $4.5 million
the
of
the 2008 Notes for 559,007 shares of
Company’s common stock. Upon exchange,
the
Company recognized a loss on the extinguishment
of debt of $1.1 million representing the difference
between the reacquisition price of the debt over its
net
of
proportionate unaccreted discount and unamortized
deferred financing costs.
including write-off
carrying
amount
On January 5, 2012, the Company repurchased all
$36 million of the outstanding 2010 Notes for cash
equal to 104.95% of the original principal amount
of the notes, plus accrued and unpaid interest. As a
result of this transaction, the Company recognized a
66
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
loss on extinguishment of debt of $5.4 million,
consisting of a cash premium of $1.8 million and
the write-off
and
unamortized
costs. Upon
repurchase, the 2010 Notes were canceled and the
second priority liens on the Company’s assets were
released.
of
deferred
unaccreted
financing
discount
On June 25, 2012, the Company repurchased $15
million of outstanding 2008 Notes for cash equal to
102% of the original principal amount, plus accrued
and unpaid interest. As a result of this transaction,
the Company recognized a loss on extinguishment
the cash
of debt of $1 million, consisting of
premium of $0.3 million and the write-off of
unaccreted discount and unamortized deferred
financing costs.
On December 31, 2012, the Company repurchased
$50.3 million of outstanding 2008 Notes for cash
equal to the original principal amount and a total
premium of $0.3 million, plus accrued and unpaid
interest. As a result of
the
Company recognized a loss on extinguishment of
debt of $0.9 million, consisting of the cash premium
and the write-off of unaccreted discount and
unamortized debt financing costs.
transaction,
this
On February 15, 2013, the Company repurchased
the remaining $5.2 million of outstanding 2008
to the original principal
Notes for cash equal
amount, plus accrued and unpaid interest. These
2008 Notes were either tendered by the holder
pursuant to the Company’s tender offer or were
redeemed by the Company pursuant to provisions of
the indenture for the 2008 Notes. Following this
repurchase,
the Company no longer has any
outstanding convertible senior notes.
Guarantees of the Convertible Notes
guaranteed
convertible
The
by
notes were
substantially all of the Company’s wholly owned
the parent
subsidiaries. Flotek Industries,
company,
no
a
independent assets or operations. The guarantees
provided by the Company’s subsidiaries were full
and unconditional, and joint and several. Any
the Company that were not
subsidiaries of
company with
holding
Inc.,
is
67
guarantors were deemed to be “minor” subsidiaries
in accordance with SEC Regulation S-X, Rule 3-10,
“Financial Statements of Guarantors and Issuers of
or Being
Guaranteed
Securities Registered
Registered.” The
the
Company’s long-term indebtedness did not contain
any significant restrictions on the ability of the
Company, or any guarantor, to obtain funds from
subsidiaries by dividend or loan.
agreements
governing
Share Lending Agreement
International
Concurrent with the offering of the 2008 Notes, the
Company entered into a share lending agreement
(the “Share Lending Agreement”) with Bear,
Stearns
Limited which was
subsequently acquired and became an indirect,
wholly owned subsidiary of JPMorgan Chase &
Company (the “Borrower”). In accordance with the
the Company loaned
Share Lending Agreement,
3.8 million shares of
its common stock (the
“Borrowed Shares”) to the Borrower for a period
commencing February 11, 2008 and ending on the
earlier of February 15, 2028 or the date the 2008
Notes were paid. The Borrower was permitted to
use the Borrowed Shares only for the purpose of
directly or indirectly facilitating the sale of the 2008
Notes and for the establishment of hedge positions
by holders of the 2008 Notes. The Company did not
require collateral
to mitigate any inherent or
associated risk of the Share Lending Agreement.
The Company did not receive any proceeds for the
Borrowed Shares, but did receive a nominal loan
fee of $0.0001 for each share loaned. The Borrower
retained all proceeds from sales of Borrowed Shares
pursuant to the Share Lending Agreement. Upon
conversion or replacement of the 2008 Notes, the
number of Borrowed Shares proportionate to the
converted or repaid notes were to be returned to the
Company. The Borrowed Shares were issued and
outstanding
purposes.
corporate
Accordingly, holders of Borrowed Shares possessed
all of the rights of a holder of the Company’s
outstanding shares, including the right to vote the
shares on all matters submitted to a vote of
stockholders and the right to receive any dividends
on
or
outstanding shares of common stock. Under the
distributions
declared
other
paid
law
for
or
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Share Lending Agreement, the Borrower agreed to
pay to the Company, within one business day after a
payment date, an amount equal to any cash dividends
that the Company paid on the Borrowed Shares, and
to pay or deliver to the Company, upon termination
any other
the
of
distribution,
the
that
Company made on the Borrowed Shares.
loan of Borrowed Shares,
in liquidation or otherwise,
To the extent the Borrowed Shares loaned under the
Share Lending Agreement were not sold or returned
to the Company, the Borrower agreed to not vote any
borrowed shares of which the Borrower was the
owner of record. The Borrower also agreed, under the
Share Lending Agreement, to not transfer or dispose
of any borrowed shares unless such transfer or
disposition was pursuant to a registration statement
that was effective under the Securities Act. Investors
that purchased shares from the Borrower, and all
subsequent
transferees of such purchasers, were
entitled to the same voting rights, with respect to
owned shares, as any other holder of common stock.
the date of
The Company valued the share lending arrangement
at $0.5 million at
issuance. The
corresponding fair value was recognized as a debt
issuance cost and was amortized to interest expense
through the earliest put date of the related debt,
February 15, 2013.
and
shares
659,340
701,102
During June 2012 and November 2011, the Borrower
returned
shares,
respectively, of the Company’s borrowed common
stock. On January 22, 2013, the remaining 2,439,558
shares of the Company’s common stock held by
J.P. Morgan Markets Limited were returned to the
Company. No consideration was paid by the
Company for the return of the Borrowed Shares. The
Share Lending Agreement has been terminated.
Shares that had been loaned under the Share Lending
Agreement were not considered outstanding for the
purpose of computing and reporting earnings per
share.
Repaid Term Loan
On March 31, 2010,
the Company executed an
Amended and Restated Credit Agreement for a $40.0
million term loan (the “Senior Credit Facility” or
“Term Loan”). The Term Loan indebtedness had a
maturity date of November 1, 2012 and scheduled
quarterly principal payments of $1.0 million, with
interest due quarterly based on an annualized interest
rate of 12.5%, which decreased upon specified
principal balance reductions.
for
Facility
provided
Senior Credit
The
a
fee of $7.3 million. The Company
commitment
allocated one-half of the commitment fee to the Term
Loan and one-half
to the Exchange Agreement
described above. Commitment fees capitalized as
deferred financing costs were amortized as additional
interest expense over the periods the term loan and
convertible
remain
outstanding.
debt were
expected
to
The Term Loan was repaid in June 2011. Upon
repayment,
the Company recognized a loss on
extinguishment of debt of $2.1 million resulting from
the write-off of unamortized deferred financing costs
and
the
beneficial conversion option of the debt.
associated with
unaccreted
discount
Capital Lease Obligations
The Company has leased equipment and vehicles
under capital
the
Company did not have any capital lease obligations.
leases. At December 31, 2013,
68
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Debt Maturities
Maturities of long-term debt at December 31, 2013 are as follows (in thousands):
Term Loan
Revolving
Credit Facility
$
10,143
7,143
7,143
7,143
14,261
$
16,272
-
-
-
-
$
Total
26,415
7,143
7,143
7,143
14,261
$
45,833
$
16,272
$
62,105
Liabilities Measured at Fair Value on a Recurring
Basis
At December 31, 2013 and 2012, no liabilities were
required to be measured at fair value on a recurring
basis. There were no transfers in or out of either
Level 1 or Level 2 fair value measurements during
the years ended December 31, 2013 and 2012.
During the year ended December 31, 2012, $2.6
million of non-cash gains were recognized as fair
value adjustments within Level 3 of the fair value
measurement hierarchy. The change resulted from
the change in the fair value of the exercisable and
contingent warrants outstanding.
amended to eliminate
On June 14, 2012, provisions in the Company’s
Exercisable and Contingent Warrant Certificates
were
anti-dilution price
adjustment provisions and remove cash settlement
provisions of a change of control event. Upon
amendment, the warrants met the requirements for
classification as equity. All fluctuations in the fair
value of the warrant liability prior to June 2012,
estimated using a Black-Scholes option pricing
model, were recognized as non-cash income or
expense items within the statement of operations. The
fair value accounting methodology for the warrant
required following the
liability is no longer
contractual amendment.
Year ending December 31,
2014
2015
2016
2017
2018
Total
Note 11 — Fair Value Measurements
Fair value is defined as the amount that would be
received for selling an asset or paid to transfer a
liability in an orderly transaction between market
participants at the measurement date. The Company
categorizes financial assets and liabilities into the
three levels of the fair value hierarchy. The hierarchy
prioritizes the inputs to valuation techniques used to
measure fair value and bases categorization within
the hierarchy on the lowest level of input that is
available
value
measurement.
significant
and
fair
the
to
‰
‰
‰
Level 1 – Quoted prices in active markets for
identical assets or liabilities;
Level 2 – Observable inputs other than Level 1,
such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not
active, or other inputs that are observable or can
be corroborated by observable market data for
substantially the full
the assets or
liabilities; and
term of
Level 3 – Significant unobservable inputs that
are supported by little or no market activity or
reporting entity’s
that
assumptions about the inputs.
are based on the
69
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 2013 and 2012, there were no transfers in or out of the Level 3 hierarchy.
Changes in Level 3 liabilities are as follows (in thousands):
Balance, beginning of year
Fair value adjustments, net
Reclassification to additional paid-in capital
Net transfers in/(out)
Balance, end of year
Year ended December 31,
2013
2012
$
$
-
-
-
-
-
$ 16,622
(2,649)
(13,973)
-
$
-
Assets Measured at Fair Value on a Nonrecurring
Basis
Fair Value of Other Financial Instruments
and
assets,
goodwill
equipment,
The Company’s non-financial
including
other
property
intangible assets are measured at fair value on a non-
recurring basis and are subject
to fair value
adjustment in certain circumstances. No impairment
of any of these assets was recognized during the
years ended December 31, 2013, 2012 and 2011.
and
of
certain
carrying
amounts
financial
The
instruments,
including cash and cash equivalents,
accounts receivable, accounts payable and accrued
expenses, approximate fair value due to the short-
term nature of these accounts. The Company had no
cash equivalents at December 31, 2013 or 2012.
The carrying value and estimated fair value of the Company’s convertible notes and long-term debt are as
follows (in thousands):
2008 Notes (1)
Term loan
Borrowings under the revolving credit facility
Capital lease obligations
December 31,
2013
2012
Carrying Value
Fair Value
Carrying Value
Fair Value
$
-
45,833
16,272
-
$
-
45,833
16,272
-
$
5,133
25,000
-
1,784
$
5,163
25,000
-
1,736
(1)
The carrying value of the 2008 Notes represents the discounted debt component only, while the fair value of the Notes is based on the
market value of the respective notes, including convertible equity features.
The estimated fair value of the 2008 Notes is based upon quoted market prices. The carrying value of the term
loan and borrowings under the revolving credit facility approximate their fair value because the interest rate is
variable. The fair value of capital lease obligations is based on recent lease rates adjusted for a risk premium.
Note 12 — Earnings Per Share
Basic earnings per common share is calculated by
dividing
common
stockholders by the weighted average number of
attributable
income
net
to
common shares outstanding for the period. Diluted
earnings per common share is calculated by dividing
income attributable to common stockholders,
net
70
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
adjusted for the effect of assumed conversions of
convertible notes and preferred stock, by the
weighted average number of
common shares
outstanding combined with dilutive common share
equivalents outstanding, if the effect is dilutive.
In connection with the sale of the 2008 Notes, the
Company entered into a Share Lending Agreement
for 3.8 million shares of the Company’s common
stock (see Note 10 – Share Lending Agreement).
Contractual undertakings of the Borrower have the
effect of substantially eliminating the economic
dilution that otherwise would result from the issuance
of the Borrowed Shares, and all shares outstanding
under the Share Lending Agreement are contractually
obligated to be returned to the Company. As a result,
shares loaned under the Share Lending Agreement
are not considered outstanding for the purpose of
computing and reporting earnings per share. The
terminated on
Share Lending Agreement was
January 22, 2013 upon the return of all Borrowed
Shares to the Company.
right
to mandatorily
the Company exercised its
On February 4, 2011,
contractual
all
outstanding shares of convertible preferred stock into
common stock. On February 15, 2013, the Company
repurchased all of the remaining $5.2 million of
outstanding 2008 Notes for cash.
convert
For the years ended December 31, 2013 and 2011,
convertible notes were excluded from the calculation
of diluted earnings per common share as inclusion
would be anti-dilutive. At December 31, 2013, 2012
and 2011, approximately 0.1 million, 0.1 million and
1.1 million stock options,
respectively, with an
exercise price in excess of the average market price
of the Company’s common stock were also excluded
from the calculation of diluted earnings per share.
Basic and diluted earnings per common share are as follows (in thousands, except per share data):
Year ended December 31,
2012
2011
2013
Net income attributable to common stockholders—Basic
Impact of assumed conversions:
Interest on convertible notes
Dividends on preferred stock
$36,178
$49,791
$26,540
-
-
1,959
-
-
141
Net income attributable to common stockholders—Diluted
$36,178
$51,750
$26,681
Weighted average common shares outstanding—Basic
Assumed conversions:
Incremental common shares from warrants
Incremental common shares from stock options
Incremental common shares from restricted stock units
Incremental common shares from convertible preferred stock before
conversion
Incremental common shares from convertible senior notes
51,346
48,185
44,229
1,355
1,133
7
-
-
1,560
992
116
-
2,701
2,222
747
-
440
-
Weighted average common shares outstanding—Diluted
53,841
53,554
47,638
Basic earnings per common share
Diluted earnings per common share
$
$
0.70
0.67
$
$
1.03
0.97
$
$
0.60
0.56
71
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — Income Taxes
Components of the income tax expense (benefit) are as follows (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Total deferred
Income tax expense (benefit)
Year ended December 31,
2012
2013
2011
$15,225
3,322
1,432
$ 12,072
1,450
891
$4,550
1,211
883
19,979
14,413
6,644
1,336
(543)
(18,836)
90
1,107
111
793
(18,746)
1,218
$20,772
$ (4,333)
$7,862
A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:
Federal statutory tax rate
State income taxes, net of federal benefit
Change in valuation allowance
Warrant liability fair value adjustment
Domestic production activities deduction
Other
Effective income tax rate
Year ended December 31,
2011
2012
2013
35.0 % 35.0 % 35.0 %
2.3
2.8
(41.0)
-
(2.0)
-
(3.0)
(2.6)
(0.8)
1.3
2.3
(8.5)
(8.5)
(1.2)
0.9
36.5 % (9.5) % 20.0 %
72
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the tax effect of temporary differences between the carrying value of assets and
liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates
expected to be in effect when the differences reverse. The components of deferred tax assets and liabilities are as
follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Allowance for doubtful accounts
Inventory valuation reserves
Equity compensation
Intangible assets and goodwill
Accrued compensation
Other
Total gross deferred tax assets
Valuation allowance
Total deferred tax assets, net
Deferred tax liabilities:
Property and equipment
Intangible assets and goodwill
Convertible debt
Prepaid insurance and other
Total gross deferred tax liabilities
Net deferred tax (liabilities) assets
Deferred taxes are presented in the balance sheets as follows (in thousands):
Current deferred tax assets
Non-current deferred tax assets
Non-current deferred tax liabilities
Net deferred tax (liabilities) assets
December 31,
2013
2012
$ 11,665
383
1,503
3,693
-
598
1
17,843
(856)
16,987
(12,374)
(9,587)
(5,020)
(47)
$ 12,285
262
1,109
4,216
13,061
-
2
30,935
(835)
30,100
(8,227)
-
(4,785)
(520)
(27,028)
(13,532)
$(10,041)
$ 16,568
December 31,
2012
2013
$ 2,522
15,012
(27,575)
$ 1,274
16,045
(751)
$(10,041) $16,568
The change in the net deferred tax assets (liabilities)
relates primarily to an increase in deferred tax
liabilities from the acquisition of Florida Chemical.
As part of its acquisition assessment, the Company
recognized a deferred tax asset related to Florida
Chemical’s allowance for doubtful accounts and
inventory obsolescence reserve expected to be
the Company
realized in the future. In addition,
recorded a deferred tax liability for the difference
between the assigned fair values of the tangible and
intangible assets acquired and the tax bases of those
assets.
As of December 31, 2013, the Company had U.S. net
operating loss carryforwards of $30.6 million,
expiring in various amounts in 2028 through 2030.
73
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The ability to utilize net operating losses and other
tax attributes could be subject
to a significant
limitation if
the Company were to undergo an
“ownership change” for purposes of Section 382 of
the Tax Code.
The Company’s corporate organizational structure
requires the filing of two separate consolidated U.S.
Federal income tax returns. Taxable income of one
group (“Group A”) cannot be offset by tax attributes,
including net operating losses of the other group
(“Group B”). The Company considers all available
evidence, both positive and negative, to determine
whether a valuation allowance is necessary. The
Company considers cumulative losses in recent years
as
significant negative evidence. The Company
considers recent years to mean the current year plus
the two preceding years.
Prior to December 31, 2012, the Company has not
had sufficient positive evidence to overcome the
existence of a cumulative loss in Group B and thus
has, prior to December 31, 2012, maintained a full
valuation allowance against deferred tax assets of
that group. As of December 31, 2012, Group B was
no longer in a cumulative loss position. Accordingly,
the Company considered the objectively verifiable
positive evidence for projecting future income, which
included primarily determining the average of the
pre-tax income of the current and prior two years
indicative of
after adjusting for certain items not
future performance. Based on this analysis,
the
Company determined a valuation allowance was no
longer necessary for the group’s U.S. federal deferred
tax assets. Accordingly, the Company decreased its
allowance
$16.5 million
at
by
valuation
December 31, 2012 and recognized a reduction of
deferred federal income tax expense. As Group B
continues to be in a cumulative loss position as of
December 31, 2013 in certain state jurisdictions, the
Company has determined that a valuation allowance
of $0.9 million is required for deferred tax assets.
intent
to reinvest
The Company has not calculated U.S.
taxes on
unremitted earnings of certain non-U.S. subsidiaries
due to the Company’s
the
unremitted earnings of the non-U.S. subsidiaries. At
December 31, 2013, the Company had approximately
$2.8 million in unremitted earnings outside the U.S.
which were not included for U.S. tax purposes. U.S.
income tax liability would be incurred if these funds
were remitted to the U.S. It is not practicable to
estimate the amount of the deferred tax liability on
such unremitted earnings.
The Company has performed an evaluation and
concluded that there are no significant uncertain tax
positions requiring recognition in the Company’s
financial statements. The evaluation was performed
for the tax years which remain subject to examination
by tax jurisdictions as of December 31, 2013 which
are the years ended December 31, 2010 through
December 31, 2013 for U.S. federal taxes and the
years
through
December 31, 2013 for state tax jurisdictions.
ended December
2009
31,
The Company’s policy is to record penalties and
interest related to income tax matters as income tax
expense.
Note 14 — Convertible Preferred Stock and Stock Warrants
In August 2009, the Company sold 16,000 units (the
“Units”), consisting of preferred stock and warrants
for $1,000 per Unit. Each Unit consisted of one share
of Series A cumulative convertible preferred stock
(“Convertible Preferred Stock”), detachable warrants
to purchase up to 155 shares of the Company’s
common stock at an exercise price of $2.31 per share
(“Exercisable Warrants”) and detachable contingent
the
warrants to purchase up to 500 shares of
Company’s common stock at an exercise price of
$2.45 per share (“Contingent Warrants”).
The gross proceeds from issuance of the Units were
allocated, at the date of the transaction, based upon
the preferred stock and warrants relative fair values.
The Company obtained third-party valuations to
assist in quantifying the relative fair value of the
Unit’s debt and equity components. The fair value of
the warrants was determined with the Black-Scholes
option-pricing model assuming a five-year term, a
volatility rate of 54%, a risk-free rate of return of
2.7%, and an assumed dividend rate of zero. The fair
the preferred stock component was
value of
74
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
determined based upon a valuation of the beneficial
conversion right and the host contract. The fair
value of
the beneficial conversion right was
estimated based upon a Monte Carlo simulation of
the Company’s possible future stock price to assess
the likelihood of conversion. Due to a lack of
comparable transactions by companies with similar
credit ratings, the value of the host contract was
determined by applying a risk-adjusted rate of
return to the annual dividend. At the date of the
transaction, the Company recorded approximately
68% of the proceeds or $10.8 million (net of the
discount recognized upon the allocation of proceeds
to the detachable warrants) as preferred stock in
stockholders’
the
detachable warrants was assessed at $5.2 million
and recorded as a warrant liability. The Company
determined that the conversion option embedded
within the preferred stock had intrinsic value
beneficial to the holders of the preferred stock. The
intrinsic value was determined to be $5.2 million
recorded as a beneficial conversion
and was
discount with an offset to additional paid-in capital
at the date of the transaction. The preferred stock
conversion period was estimated to be 36 months
based upon an evaluation of the conversion options.
fair value of
equity. The
Preferred Stock
Each share of Convertible Preferred Stock was
convertible at any time, at the holder’s option, into
434.782 shares of the Company’s common stock.
This conversion rate represents an equivalent
conversion price of approximately $2.30 per share
of common stock.
Each share of Convertible Preferred Stock had a
liquidation preference of $1,000. Dividends accrued
at a rate of 15% of the liquidation preference per
year and accumulated,
if not paid quarterly.
Subsequent to February 11, 2010, the Company had
the ability to convert
the preferred shares into
common shares if the closing price of the common
stock met certain price criteria. In the event any
Convertible Preferred Stock was converted,
the
Company was obligated to pay an amount, in cash
or common stock, equal to eight quarterly dividend
payments less any dividends previously paid.
75
on
and
dividends
the Company paid all
On January 6, 2011,
accumulated
the
unpaid
outstanding shares of Convertible Preferred Stock
in shares of the Company’s common stock. The
payment, at an annual rate of 15% of the liquidation
preference, covered the period from issuance,
August 12, 2009,
through December 31, 2010.
Dividends per share of $208.33 were paid in shares
of common stock valued at $4.81, based upon the
prior ten business day volume-weighted average
price per share. Fractional shares were paid in cash.
right
convert
to mandatorily
On February 4, 2011, the Company exercised its
all
contractual
outstanding shares of Convertible Preferred Stock
into shares of common stock at
the prevailing
conversion rate of 434.782 shares of common stock
for each share of preferred stock. The Company
issued 4,871,719 shares of common stock for
preferred share conversions during 2011, including
those mandatorily converted. Holders of preferred
to mandatory conversion were
shares
entitled to eight quarterly dividend payments. On
February 4, 2011, dividends per share of $91.67
were paid in shares of common stock valued at
ten business day
$6.63, based upon the prior
share.
price
volume-weighted
Fractional shares were paid in cash.
average
subject
per
Stock Warrants
upon
Exercisable Warrants were
exercisable
issuance and expire August 12, 2014,
if not
exercised. Contingent Warrants became exercisable
on November 9, 2009, and expire November 9,
2014, if not exercised. Prior to June 14, 2012, the
warrants contained anti-dilution price protection in
the event the Company issued shares of common
stock or securities exercisable for, or convertible
into, common stock at a price per share less than the
warrants’ exercise price. In accordance with these
contractual
adjustment
provisions, the warrants were re-priced as a result
of a payment of a portion of the initial and deferred
commitment fees related to the Company’s term
loan with common stock on March 31, 2010 and
September 30, 2010.
anti-dilution
price
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Due to the anti-dilution price adjustment provisions
established at the issuance date, the warrants were
deemed to be a liability and were recorded at fair
value at the date of issuance. The warrant liability
was adjusted to fair value at the end of each reporting
period through the statement of operations during the
period the anti-dilution price adjustment provisions
were in effect. On June 14, 2012, contractual
provisions within the Company’s Exercisable and
Contingent Warrant agreements were modified to
eliminate
adjustment
provisions of the warrants and remove the cash
settlement provisions in the event of a change of
control. The amended warrants now qualify to be
classified as equity. Accordingly,
the Company
revalued the warrants as of June 14, 2012, the date of
contractual amendment. The change in fair value of
the warrant liability compared to the fair value on
December 31, 2011, $2.6 million, was recognized in
income during 2012. The revalued warrant liability of
$14.0 million was reclassified to additional paid-in
capital on June 14, 2012. There will no longer be fair
anti-dilution
price
the
value adjustments as long as the warrants continue to
meet the criteria for equity classification.
The Company used the Black-Scholes option-pricing
model
to estimate the fair value of the warrant
liability for each reporting period. On June 14, 2012,
the date the warrants were amended, inputs into the
fair value calculation included the actual remaining
term of the warrants, a volatility rate of 58.1%, a
risk-free rate of return of 0.36%, and an assumed
dividend rate of zero.
respectively, of
During the years ended December 31, 2013 and
2012, warrants were exercised to purchase 267,000
shares and 348,350 shares,
the
Company’s common stock for which the Company
received cash proceeds of $0.3 million and $0.4
respectively. At December 31, 2013,
million,
Exercisable and Contingent Warrants to purchase up
to 1,277,250 shares of common stock at $1.21 per
share remain outstanding.
Note 15 — Common Stock
The Company’s Certificate of Incorporation, as amended November 9, 2009, authorizes the Company to issue up
to 80 million shares of common stock, par value $0.0001 per share, and 100,000 shares of one or more series of
preferred stock, par value $0.0001 per share.
A reconciliation of the changes in common shares issued is as follows:
Shares issued at the beginning of the year
Issued to purchase Florida Chemical Company
Issued upon exercise of warrants
Issued from restricted stock units
Issued as restricted stock award grants
Issued upon exercise of stock options
Year ended December 31,
2013
2012
53,123,978
3,284,180
267,000
217,089
802,164
571,500
51,957,652
-
348,350
-
750,476
67,500
Shares issued at the end of the year
58,265,911
53,123,978
76
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Incentive Plans
Stockholders approved long term incentive plans in
2010, 2007, 2005 and 2003 (the “2010 Plan,” the
“2007 Plan,” the “2005 Plan” and the “2003 Plan,”
respectively) under which the Company may grant
equity awards to officers, key employees, and non-
employee directors in the form of stock options,
restricted stock and certain other incentive awards.
The maximum number of shares that may be issued
under the 2010 Plan, 2007 Plan and 2005 Plan are
6.0 million, 2.2 million and 1.9 million, respectively.
A December 31, 2013, the Company had a total of
0.3 million shares remaining to be granted under the
2010 Plan, 2007 Plan and 2005 Plan. Shares may no
longer be granted under the 2003 Plan.
Stock Options
All stock options are granted with an exercise price
equal to the market value of the Company’s common
stock on the date of grant. Options expire no later
than ten years from the date of grant and generally
vest in four years or less. Proceeds received from
stock option exercises are credited to common stock
and additional paid-in capital, as appropriate. The
Company uses historical data to estimate pre-vesting
option forfeitures. Estimates are adjusted when actual
forfeitures differ
from the estimate. Stock-based
compensation expense is recorded for all equity
awards expected to vest.
The fair value of stock options at the date of grant is
calculated using the Black-Scholes option pricing
model. The risk free interest rate is based on the
implied yield of U.S. Treasury zero-coupon securities
that correspond to the expected life of the option.
Volatility is estimated based on historical and
implied volatilities of the Company’s stock and of
identified companies considered to be representative
peers of the Company. The expected life of awards
granted represents the period of time the options are
expected to remain outstanding. The Company uses
the “simplified” method which is permitted for
companies
reasonably estimate the
expected life of options based on historical share
option exercise experience. The Company does not
expect
to pay dividends on common stock. No
options were granted to employees during 2013 and
2012.
that cannot
Assumptions used in the Black-Scholes option pricing model for stock options granted in 2011 are as follows:
Risk-free interest rate
Expected volatility of common stock
Expected life of options in years
Dividend yield
Vesting period in years
Year ended
December 31, 2011
.94%-1.825%
67.7%-70.3%
3.50*-4.00
- %
3.5-4.0
* Grants were made to an optionee for whom the Company was able to reasonably estimate the expected life of the award.
The Black-Scholes option valuation model was developed to estimate the fair value of traded options that have
no vesting restrictions and are fully-transferable. Because option valuation models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value calculation. The Company’s
options are not characteristic of traded options; therefore, the option valuation models do not necessarily provide
a reliable measure of the fair value of options.
77
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity for the year ended December 31, 2013 is as follows:
Options
Outstanding as of January 1, 2013
Exercised
Forfeited
Expired
Shares
2,457,586
(571,500)
(5,000)
(17,044)
$
Outstanding as of December 31, 2013
1,864,042
$
Weighted-Average
Exercise
Price
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic Value
5.65
7.70
1.38
22.40
4.95
6.26
$
28,253,321
Vested or expected to vest at
December 31, 2013
Options exercisable as of
December 31, 2013
1,862,960
$
4.95
6.26
$
28,216,770
1,836,942
$
4.98
6.25
$
27,763,907
with terms
specified in the Restricted Stock
Agreements (“RSAs”). Time-vesting restricted shares
vest after a stipulated period of time has elapsed
subsequent to the date of grant, generally three to
four years. Certain time-vested shares have also been
issued with a portion of the shares granted vesting
immediately. Performance-based restricted shares are
issued with performance criteria defined over a
designated performance period and vest only when,
the outlined performance criteria are met.
and if,
During the year
ended December 31, 2013,
approximately 71% of the restricted shares granted
remainder were
were
performance-based. Grantees of
restricted shares
retain voting rights for the granted shares.
time-vesting
and
the
The weighted-average grant-date fair value of stock
options granted during the year ended December 31,
2011 was $8.47 per share. The total intrinsic value of
stock options exercised during the years ended
December 31, 2013, 2012 and 2011 was $5.6 million,
$0.6 million and $0.2 million, respectively. The total
fair value of stock options vesting during the years
ended December 31, 2013, 2012 and 2011 was $4.2
million, $0.5 million and $0.5 million, respectively.
of measured
At December 31, 2013, the Company had less than
unrecognized
$0.1 million
compensation expense related to non-vested stock
options. This cost is expected to be recognized over a
weighted-average period of 0.9 years.
but
Restricted Stock
The Company grants employees either time-vesting
or performance-based restricted shares in accordance
78
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock share activity for the year ended December 31, 2013 is as follows:
Restricted Stock Shares
Non-vested at January 1, 2013
Granted
RSAs converted from 2012 restricted stock units
Vested
Forfeited
Shares
1,324,290
629,135
173,029
(943,447)
(115,352)
Non-vested at December 31, 2013
1,067,655
$
Weighted-
Average Fair
Value at Date of
Grant
$
9.15
15.17
11.04
8.87
13.50
12.78
The weighted-average grant-date
fair value of
restricted stock granted during the years ended
December 31, 2013, 2012 and 2011 was $15.17,
$11.03 and $8.79 per share, respectively. The total
fair value of restricted stock that vested during the
years ended December 31, 2013, 2012 and 2011 was
$8.4 million, $5.4 million,
and $7.2 million,
respectively.
At December 31, 2013, there was $8.5 million of
unrecognized compensation expense related to non-
unrecognized
stock.
vested
restricted
The
compensation expense is expected to be recognized
over a weighted-average period of 1.8 years.
Restricted Stock Units
During the year ended December 31, 2013,
the
Company granted performance-based restricted stock
units (“RSUs”) that will be converted into 175,576
shares of common stock. One-third of these shares
will be issued as common stock in 2014 and the
remaining 117,050 shares will be converted into
RSAs that will vest in 2015 and 2016.
Restricted stock unit share activity for the year ended December 31, 2013 is as follows:
Restricted Stock Unit Shares
RSU share equivalents at January 1, 2013
Issued as shares in 2013
2012 RSUs converted to RSAs in 2013
Share equivalents earned in 2013
RSU share equivalents at December 31, 2013
At December 31, 2013, there was $1.9 million of
unrecognized compensation expense related to 2013
restricted
unrecognized
compensation expense is expected to be recognized
over a weighted-average period of 1.9 years.
units.
stock
The
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (ESPP)
was approved by stockholders on May 18, 2012. The
79
Weighted-
Average Fair
Value at Date of
Grant
$
$
11.04
11.04
11.04
16.35
16.35
Shares
390,118
(217,089)
(173,029)
175,576
175,576
Company registered 500,000 shares of its common
stock, currently held as treasury shares, for issuance
under the ESPP. The purpose of the ESPP is to provide
employees with an opportunity to purchase shares of the
Company’s common stock through accumulated payroll
deductions. The ESPP allows participants to purchase
common stock at a purchase price equal to 85% of the
fair market value of the common stock on the last
business day of a three-month offering period which
coincides with calendar quarters. The first quarterly
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the
plan
offering period began on October 1, 2012. Payroll
deductions may not exceed 10% of an employee’s
compensation and participants may not purchase more
than 1,000 shares in any one offering period. The fair
value of the discount associated with shares purchased
share-based
under
compensation expense and was $0.1 million and less
than $0.1 million in 2013 and 2012, respectively. The
total fair value of the shares purchased under the plan
during 2013 and 2012 was $0.9 million and $0.2
million, respectively. The employee cost associated
with participation in the plan was satisfied through
payroll deductions.
recognized
as
is
Share-Based Compensation Expense
Non-cash share-based compensation expense related
to stock options, restricted stock, restricted stock unit
grants and stock purchased under the Company’s
ESPP was $10.9 million, $13.4 million and $7.4
million during the years ended December 31, 2013,
2012 and 2011, respectively.
Treasury Stock
The Company accounts for treasury stock using the
treasury stock as a
cost method and includes
component of stockholders’ equity. During the years
ended December 31, 2013 and 2012, the Company
Note 16 — Commitments and Contingencies
Litigation
The Company is subject
to routine litigation and
other claims that arise in the normal course of
business. Management is not aware of any pending or
threatened lawsuits or proceedings that are expected
to have a material effect on the Company’s financial
position, results of operations or liquidity.
Representation Agreements
In February 2011, the Company entered into two
agreements with Basin
separate
Supply
a
(“Basin
multinational, energy industry-focused supply chain
the
management company,
representation
Corporation
to market certain of
Supply”),
80
purchased 448,121 shares and 166,334 shares,
respectively, of the Company’s common stock at
market value as payment of income tax withholding
owed by employees upon the vesting of restricted
shares and the exercise of stock options. Shares
issued as restricted stock awards to employees that
were forfeited are accounted for as treasury stock.
Shares surrendered for the exercise of stock options
were 237,267 during the year ended December 31,
2013. These surrendered shares are also accounted
for as treasury stock.
During the years ended December 31, 2013 and
2012, JP Morgan Chase & Co. returned 2,439,558
shares and 659,340 shares,
the
Company’s common stock that had been borrowed
under the Share Lending Agreement. These shares
are now included in treasury stock.
respectively, of
Stock Repurchase Plan
of
the Company’s
In November 2012,
the Company’s Board of
Directors authorized the repurchase of up to $25
million
stock.
Repurchases may be made in the open market or
through privately negotiated transactions. Through
not
December
repurchased any of its common stock through this
repurchase program.
the Company
common
2013,
has
31,
and
specialty
chemicals
Company’s
downhole
drilling products and services in various international
including the Middle East, Africa, Latin
markets,
America
former Soviet Union. Both
and the
agreements are effective through December 31, 2015
and each provided for a non-refundable retainer of
$100,000 which was paid to Basin Supply in 2011 to
assist with start-up and overhead costs. Under each
agreement, Basin Supply is also eligible to receive
warrants to purchase Flotek common stock upon
exceeding contractually defined annual base and
“stretch” sales targets. The number of warrants that
could be issued under the terms of each of the
agreements is 100,000 during 2014.
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Operating Lease Commitments
The Company has operating leases for office space,
vehicles and equipment. Future minimum lease
payments under operating leases at December 31,
2013 are as follows (in thousands):
Year ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total
Minimum
Lease
Payments
$ 1,598
1,284
1,192
875
677
3,551
$ 9,177
Rent expense under operating leases totaled $1.7
million, $1.9 million and $1.8 million during the
years ended December 31, 2013, 2012 and 2011,
respectively.
401(k) Retirement Plan
The Company maintains a 401(k) retirement plan for
the benefit of eligible employees in the U.S. All
Note 17 — Segment Information
Segment Information
is
Operating segments are defined as components of an
enterprise for which separate financial information is
regularly evaluated by chief
available
that
operating decision-makers
in deciding how to
allocate resources and assess performance. With its
acquisition of Florida Chemical Company, Inc. on
May 10, 2013, the Company added operations in a
new segment, Consumer and Industrial Chemical
Technologies. The operations of the Company are
reportable segments:
now categorized into four
and
Energy Chemical Technologies, Consumer
Industrial
Drilling
Technologies and Artificial Lift Technologies.
Technologies,
Chemical
‰
Energy
designs,
develops, manufactures, packages and markets
Technologies
Chemical
employees are eligible to participate in the plan upon
employment. The Company matches 100% of
employee 401(k) contributions of up to 2% of
qualified compensation. During the years ended
December 31, 2013, 2012 and 2011, compensation
expense included $0.6 million, $0.5 million and $0.4
million,
related to the Company’s
401(k) match.
respectively,
Concentrations and Credit Risk
The majority of the Company’s revenue is derived
from the oil and gas industry. Customers include
major oilfield services companies, major integrated
oil and natural gas companies, independent oil and
natural gas companies, pressure pumping service
companies and state-owned national oil companies.
This concentration of customers in one industry
increases credit and business risks.
The Company is subject to significant concentrations
of credit risk within trade accounts receivable as the
Company does not generally require collateral as
support
the
majority of the Company’s cash is maintained at a
major financial institution and balances often exceed
insurable amounts.
trade receivables.
In addition,
for
specialty chemicals, some of which hold patent
protection, used in oil and gas well cementing,
stimulation, acidizing, drilling and production.
Activities
include
construction and management of automated
material handling facilities and management of
loading facilities and blending operations for
oilfield services companies.
segment
also
this
in
Consumer and Industrial Chemical Technologies
designs, develops and manufactures products
that are sold to companies in the flavor and
fragrance industry and the specialty chemical
are used by
technologies
industry. These
beverage
fragrance
food
companies, and companies providing household
and industrial cleaning products.
companies,
and
‰
81
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
‰
‰
Technologies
inspects,
Drilling
manufactures and markets downhole drilling
equipment used in energy, mining, water well
and industrial drilling activities.
rents,
assembles
and
Artificial Lift Technologies
markets artificial lift equipment, including the
Petrovalve™ product
pump
components, electric submersible pumps, gas
separators, valves and services that support
natural gas, oil and coal bed methane production
activities.
line
rod
of
operating
income. Various
The Company evaluates performance based upon a
variety of criteria. The primary financial measure is
segment
functions,
including certain sales and marketing activities and
general and administrative activities, are provided
centrally by the corporate office. Costs associated
with corporate office functions, other corporate
income and expense items, and income taxes are not
allocated to reportable segments.
Summarized financial information of the reportable segments is as follows (in thousands):
As of and for the
year ended December 31,
2013
Net revenue from external
customers
Gross margin
Income (loss) from operations
Depreciation and amortization
Total assets
Capital expenditures
2012
Net revenue from external
customers
Gross margin
Income (loss) from operations
Depreciation and amortization
Total assets
Capital expenditures
2011
Net revenue from external
customers
Gross margin
Income (loss) from operations
Depreciation and amortization
Total assets
Capital expenditures
Energy
Chemical
Technologies
Consumer and
Industrial
Chemical
Technologies
Drilling
Technologies
Artificial Lift
Technologies
Corporate and
Other
Total
$200,932
88,536
65,396
3,160
127,119
5,225
$183,986
81,438
65,440
1,765
59,195
3,553
$140,836
56,115
43,549
1,594
54,958
2,231
$42,927
10,659
6,260
1,126
86,640
183
$112,406
43,156
18,306
9,632
135,738
6,326
$14,800
5,176
3,060
250
16,647
1,749
$
-
-
(34,296)
941
9,437
1,524
$371,065
147,527
58,726
15,109
375,581
15,007
$116,736
45,709
22,282
9,115
118,771
12,264
$12,106
4,472
3,395
206
11,189
77
$
-
-
(32,496)
497
30,712
4,807
$312,828
131,619
58,621
11,583
219,867
20,701
$102,470
43,607
23,035
8,061
113,130
6,025
$15,479
6,098
4,296
196
10,815
182
$
-
-
(21,992)
254
53,109
1,546
$258,785
105,820
48,888
10,105
232,012
9,984
$
$
-
-
-
-
-
-
-
-
-
-
-
-
82
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Geographic Information
Revenue by country is based on the location where services are provided and products are sold. No individual
country other than the United States (“U.S.”) accounted for more than 10% of revenue. Revenue by geographic
location is as follows (in thousands):
U.S.
Other countries
Total
Year ended December 31,
2012
2013
$
$
319,649
51,416
371,065
$
$
272,945
39,883
312,828
$
$
2011
222,304
36,481
258,785
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial
statements.
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:
Year ended December 31,
2012
2011
2013
Customer A
Customer B
Customer C
16.2%
*
*
15.6%
10.0%
*
13.1%
*
10.8%
* These customers did not account for more than 10% of revenue.
Over 95% of the revenue from major customers noted above was from the Energy Chemical Technologies
segment.
83
FLOTEK INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Quarterly Financial Data (Unaudited)
2013
Revenue
Gross margin
Net income
Earnings per share (1):
Basic
Diluted
2012
Revenue
Gross margin
Net income
Earnings per share (1):
Basic
Diluted
First Quarter
Fourth
Third
Second
Quarter
Quarter
Quarter
(in thousands, except per share data)
Total
$
$
$
$
$
$
78,243
32,630
7,765
0.16
0.15
79,195
33,451
3,606
0.08
0.07
$
$
$
$
$
$
$
93,586
37,594
8,440
$
98,388
37,502
8,968
$
100,848
39,801
11,005
371,065
147,527
36,178
0.17
0.16
78,303
33,025
13,178
0.27
0.25
$
$
$
$
$
0.17
0.16
78,628
33,843
9,806
0.20
0.19
$
$
$
$
$
0.21
0.20
76,702
31,300
23,201
0.48
0.44
$
$
$
$
$
0.70
0.67
312,828
131,619
49,791
1.03
0.97
(1) The sum of the quarterly earnings per share (basic and diluted) may not agree to the earnings per share for the year due to the timing of
common stock issuances.
Note 19 — Subsequent Events
Acquisition of Eclipse IOR Services, LLC
(“EOGA”)
Effective January 1, 2014, the Company acquired
100% of
the membership interests in EOGA, a
leading Enhanced Oil Recovery (“EOR”) design and
injection firm, for $5.25 million and 94,354 shares of
the Company’s Common Stock. EOGA’s enhanced
oil recovery processes and its use of polymers to
improve the performance of EOR projects will be
combined with the Company’s
products and services.
existing EOR
Exercise of Stock Warrants
On February 7, 2014, warrants were exercised to
purchase 1,277,250 shares of
the Company’s
common stock at $1.21 per share. The Company
received cash proceeds of $1.5 million in connection
with the warrants exercised. Following the exercise,
the Company no longer had any outstanding warrants
from its sale of preferred stock and warrants in
August 2009 (see Note 14).
84
assessed
financial
officers,
internal control over
management, including the principal executive and
principal
the
effectiveness of
financial
reporting as of December 31, 2013, based on
criteria issued by the Committee of Sponsoring
the Treadway Commission
Organizations
“Internal Control-Integrated
(COSO)
the Company’s
Framework.” Upon evaluation,
the Company’s
management has concluded that
internal
reporting was
financial
control over
effective in connection with the preparation of the
consolidated
of
December 31, 2013.
of
entitled
statements
financial
as
Florida
acquired
Company
The
Chemical
Company, Inc. (“Florida Chemical”) on May 10,
2013. The Company has excluded Florida Chemical
from its assessment of
internal control over
financial reporting as permitted by guidance issued
by the staff of the SEC for a recently acquired
represented
business.
approximately 37% and 14% of the Company’s
consolidated total assets and consolidated revenue,
respectively,
ended
as of
December 31, 2013.
the year
Chemical
and for
Florida
The effectiveness of the Company’s internal control
over financial reporting as of December 31, 2013
has been audited by Hein & Associates LLP, an
independent registered public accounting firm, as
stated in their report which is included herein.
Changes in Internal Control Over Financial
Reporting
There have been no changes in the Company’s
system of internal control over financial reporting
during the three months ended December 31, 2013
that have materially affected, or are reasonably
likely to materially affect, the Company’s internal
control over financial reporting.
Item 9B. Other Information.
None.
Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and
Procedures
The Company’s disclosure controls and procedures
are designed to ensure that information required to
be disclosed by the Company in reports filed or
submitted under the Securities Exchange Act of
1934, as amended (the “Exchange Act”),
is
recorded, processed,
summarized and reported
within the time periods specified in the SEC’s rules
and forms. The Company’s disclosure controls and
procedures are also designed to ensure such
information is accumulated and communicated to
management, including the principal executive and
principal financial officers, as appropriate to allow
timely decisions regarding required disclosures.
There are inherent limitations to the effectiveness of
any system of disclosure controls and procedures,
including the possibility of human error and the
circumvention or overriding of
and
procedures. Accordingly, even effective disclosure
provide
controls
reasonable assurance that control objectives are
attained. The Company’s disclosure controls and
procedures are designed to provide such reasonable
assurance.
procedures
controls
only
and
can
The Company’s management, with the participation
of the principal executive and principal financial
officers, evaluated the effectiveness of the design
and operation of the Company’s disclosure controls
and procedures as of December 31, 2013, as
required by Rule 13a-15(e) of the Exchange Act.
Based upon that evaluation, the principal executive
and principal financial officers have concluded that
the Company’s disclosure controls and procedures
were effective as of December 31, 2013.
Management’s Report on Internal Control over
Financial Reporting
The Company’s management
is responsible for
establishing and maintaining adequate internal
control over financial reporting, as defined in Rule
13a-15(f) of the Exchange Act. The Company’s
85
PART III
the Company’s Definitive Proxy Statement for the
2014 Annual Meeting of Stockholders to be filed
within 120 days of year end, is incorporated herein
by reference.
Item 13. Certain Relationships and Related
Transactions, and Director Independence.
the
caption
under
and Related Transactions,
“Certain
Information
and
Relationships
Director Independence,” will be contained in the
Company’s Definitive Proxy Statement for the 2014
Annual Meeting of Stockholders to be filed within
120 days of year end, is incorporated herein by
reference.
Item 14. Principal Accountant Fees and
Services.
under
caption
Information
“Principal
the
Accountant Fees and Services,” will be contained in
the Company’s Definitive Proxy Statement for the
2014 Annual Meeting of Stockholders to be filed
within 120 days of year end, is incorporated herein
by reference.
Item 10. Directors, Executive Officers and
Corporate Governance.
Information under the caption “Directors, Executive
Officers and Corporate Governance,” will be
contained in the Company’s Definitive Proxy
Statement
the 2014 Annual Meeting of
Stockholders to be filed within 120 days of year
end, is incorporated herein by reference.
for
Item 11. Executive Compensation.
under
caption
Information
“Executive
the
Compensation,” will be contained in the Company’s
Definitive Proxy Statement for the 2014 Annual
Meeting of Stockholders to be filed within 120 days
of year end, is incorporated herein by reference.
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related
Stockholder Matters.
Information under the caption “Security Ownership
of Certain Beneficial Owners and Management and
Related Stockholder Matters,” will be contained in
86
Item 15.
Exhibits and Financial Statement Schedules.
PART IV
EXHIBIT INDEX
Exhibit
Number
Exhibit Title
2.1
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Agreement and Plan of Merger dated May 10, 2013, by and among Flotek Industries, Inc., Flotek
Acquisition Inc. and Florida Chemical Company, Inc. (incorporated by reference to Exhibit 2.1 to the
Company’s Form 8-K filed on May 13, 2013).
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the
Company’s Form 10-Q for the quarter ended September 30, 2007).
for Series A Cumulative Convertible Preferred Stock dated
Certificate of Designations
August 11, 2009 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on
August 17, 2009).
Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009).
Bylaws (incorporated by reference to Appendix F to the Company’s Definitive Proxy Statement filed
on September 27, 2001).
Form of Certificate of Common Stock (incorporated by reference to Appendix E to the Company’s
Definitive Proxy Statement filed on September 27, 2001).
Form of Certificate of Series A Cumulative Convertible Preferred Stock (incorporated by reference
to Exhibit A to the Certificate of Designations for Series A Cumulative Convertible Preferred Stock
filed as Exhibit 3.1 to the Company’s Form 8-K filed on August 17, 2009).
Form of Warrant to Purchase Common Stock of the Company, dated August 31, 2000 (incorporated
by reference to Exhibit 4.3 to the Company’s Registration Statement on Form SB-2
(File no. 333-129308) filed on October 28, 2005).
Form of Exercisable Warrant, dated August 11, 2009 (incorporated by reference to Exhibit 4.1 to the
Company’s Form 8-K filed on August 17, 2009).
Form of Contingent Warrant, dated August 11, 2009 (incorporated by reference to Exhibit 4.2 to the
Company’s Form 8-K filed on August 17, 2009).
Amendment to Warrant to Purchase Common Stock, dated June 14, 2012, by and among the
Company and each of the holders party thereto (incorporated by reference to Exhibit 10.1 to the
Company’s Form 8-K filed on June 18, 2012).
2003 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s
Registration Statement on Form S-8 filed on October 27, 2005).
2005 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s
Registration Statement on Form S-8 filed on October 27, 2005).
2007 Long Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s
Form 10-K for the year ended December 31, 2007).
Exclusive License Agreement, dated April 3, 2006, among the Company, USA Petrovalve, Inc. and
Total Well Solutions, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Form
10-QSB for the quarter ended June 30, 2006).
Form of Unit Purchase Agreement, dated August 11, 2009 (incorporated by reference to Exhibit 10.1
to the Company’s Form 8-K filed on August 12, 2009).
Employment Agreement, dated August 11, 2009, between the Company and Jesse Neyman
(incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on August 12, 2009).
Indenture, dated as of March 31, 2010, among the Company, the subsidiary guarantors named therein
and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 to the Company’s
Form 8-K filed on April 6, 2010).
2010 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive
Proxy Statement filed on July 13, 2010).
Form of Subscription Agreement (incorporated by reference to Exhibit 4.7 to the Company’s
Registration Statement on Form S-3 (File No. 333-174199) filed on May 13, 2011).
87
Exhibit
Number
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Exhibit Title
Amendment to Employment Agreement, dated May 19, 2011, between the Company and Jesse E.
Neyman (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended
June 30, 2011).
Non-Qualified Stock Option Agreement, dated April 8, 2011, between the Company and Steve
Reeves (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended
June 30, 2011).
Non-Qualified Stock Option Agreement, dated April 8, 2011, between the Company and John W.
Chisholm (incorporated by reference to Exhibit 10.7 to the Company’s Form 10-Q for the quarter ended
June 30, 2011).
Revolving Credit and Security Agreement dated as of September 23, 2011 (incorporated by reference
to Exhibit 10.1 to the Company’s Form 8-K filed on September 26, 2011).
Guaranty dated September 23, 2011 (incorporated by reference to Exhibit 10.2 to the Company’s
Form 8-K filed on September 26, 2011).
Security Agreement dated September 23, 2011 (incorporated by reference to Exhibit 10.3 to the
Company’s Form 8-K filed on September 26, 2011).
Intellectual Property Security Agreement dated September 23, 2011 (incorporated by reference to
Exhibit 10.4 to the Company’s Form 8-K filed on September 26, 2011).
Lien Subordination and Intercreditor Agreement dated as of September 23, 2011 (incorporated by
reference to Exhibit 10.5 to the Company’s Form 8-K filed on September 26, 2011).
Employment Agreement, dated November 30, 2011, between the Company and Kevin Fisher
(incorporated by reference to Exhibit 10.69 to the Company’s Form 10-K for the year ended
December 31, 2011).
Third Amended and Restated Service Agreement, dated as of March 5, 2012, by and among the
Company, Protechnics II, Inc. and Chisholm Management, Inc. (incorporated by reference to Exhibit
10.1 to the Company’s Form 8-K filed on March 12, 2012).
Employment Agreement, dated June 1, 2012, between the Company and Steve Reeves (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 21, 2012).
Retirement Agreement, dated September 12, 2012, by and between Jesse E. Neyman and the
Company (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on
September 18, 2012).
Second Amendment to Revolving Credit and Security Agreement dated as of November 12, 2012
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on November 14, 2012).
Third Amendment to Revolving Credit and Security Agreement dated as of December 14, 2012
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 17, 2012).
Fourth Amendment
to Revolving Credit Security Agreement dated as of December 27, 2012
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 28, 2012).
Resignation Agreement, dated January 25, 2013 between the Company and Johnna D. Kokenge
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 28, 2013).
Employment Agreement, dated effective March 13, 2013 between the Company and H. Richard Walton
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 15, 2013).
Restricted Stock Agreement, dated effective March 13, 2013 between the Company and H. Richard
Walton (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on March 15,
2013).
Fourth Amended and Restated Service Agreement, dated as of April 1, 2013 between the Company,
Protechnics II, Inc. and Chisholm Management, Inc. (incorporated by reference to Exhibit 10.1 to the
Company’s Form 8-K filed on April 3, 2013).
Letter Agreement, dated as of April 1, 2013 between the Company and John Chisholm (incorporated
by reference to Exhibit 10.2 to the Company’s Form 8-K filed on April 3, 2013).
Registration Rights Agreement dated May 10, 2013, by and among Flotek Industries, Inc. and the
stockholders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed
on May 13, 2013).
Amended and Restated Revolving Credit, Term Loan and Security Agreement dated May 10, 2013
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on May 13, 2013).
88
Exhibit
Number
10.32
10.33
10.34
Exhibit Title
Amendment to Employment Agreement dated June 1, 2012 between the Company and Steven A.
Reeves, effective June 23, 2013 (incorporated by reference to Exhibit 10.5 to the Company’s Form
10-Q for the quarter ended June 30, 2013).
Amendment to Employment Agreement dated November 10, 2011 between the Company and
Kevin Fisher, effective June 23, 2013 (incorporated by reference to Exhibit 10.6 to the Company’s
Form 10-Q for the quarter ended June 30, 2013).
First Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement
dated December 31, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K
filed on January 7, 2014).
List of Subsidiaries.
Consent of Hein & Associates LLP.
Rule 13a-14(a) Certification of Principal Executive Officer.
Rule 13a-14(a) Certification of Principal Financial Officer.
Section 1350 Certification of Principal Executive Officer.
Section 1350 Certification of Principal Financial Officer.
21*
23*
31.1*
31.2*
32.1*
32.2*
101.INS** XBRL Instance Document.
101.SCH** XBRL Schema Document.
101.CAL** XBRL Calculation Linkbase Document.
101.LAB** XBRL Label Linkbase Document.
101.PRE** XBRL Presentation Linkbase Document.
101.DEF** XBRL Definition Linkbase Document.
* Filed herewith.
** Furnished with this Form 10-K, not filed.
89
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
FLOTEK INDUSTRIES, INC.
By:
JOHN W. CHISHOLM
/s/
John W. Chisholm
President, Chief Executive Officer and
Chairman of the Board
Date: February 10, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JOHN W. CHISHOLM
President, Chief Executive Officer and
February 10, 2014
John W. Chisholm
Chairman of the Board
(Principal Executive Officer)
/s/ H. RICHARD WALTON
Chief Financial Officer
February 10, 2014
H. Richard Walton
/s/ KENNETH T. HERN
Kenneth T. Hern
/s/ JOHN S. REILAND
John S. Reiland
/s/ L. MELVIN COOPER
L. Melvin Cooper
/s/ L.V. “BUD” MCGUIRE
L.V. “Bud” McGuire
/s/ CARLA S. HARDY
Carla S. Hardy
/s/ TED D. BROWN
Ted D. Brown
February 10, 2014
February 10, 2014
February 10, 2014
February 10, 2014
February 10, 2014
February 10, 2014
(Principal Financial Officer and
Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
90
FLOTEK INDUSTRIES, INC.
LIST OF SUBSIDIARIES
EXHIBIT 21
CESI Chemical, Inc.
Oklahoma Corporation
Material Translogistics, Inc.
Texas Corporation
Padko International Incorporated
Oklahoma Corporation
Petrovalve International, Inc.
Alberta Corporation
Petrovalve, Inc.
Delaware Corporation
USA Petrovalve, Inc.
Texas Corporation
Turbeco, Inc.
Texas Corporation
Flotek Paymaster, Inc.
Texas Corporation
Teledrift Company
Delaware Corporation
CESI Manufacturing, LLC
Oklahoma Limited Liability Company
Flotek Industries FZE
Jebel Ali Free Zone Establishment
Flotek International, Inc.
Delaware Corporation
Flotek Ecuador Investments, LLC
Texas Limited Liability Company
Flotek Ecuador Management, LLC
Texas Limited Liability Company
Flotek Chemical Ecuador Cia. Ltda.
Ecuador Limited Liability Company
Florida Chemical Company, Inc.
Delaware Corporation
FC Pro, LLC
Delaware Limited Liability Company
FCC International, Inc.
Florida Corporation
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements filed on Form S-8 (Nos. 333-
129268, 333-157276, 333-172596, 333-174983 and 333-183617) and on Form S-3 (Nos. 333-161552, 333-
166442, 333-166443, 333-173806, 333-174199 and 333-189555) of Flotek Industries, Inc. and subsidiaries (the
“Company”) of our reports dated February 10, 2014, relating to the consolidated financial statements of Flotek
Industries, Inc. and subsidiaries as of December 31, 2013 and 2012, and for each of the three years in the period
ended December 31, 2013, and to the Company’s internal control over financial reporting, which are included in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities
and Exchange Commission on February 10, 2014.
We also consent to the reference to our firm under the heading “Experts” in such Registration Statements.
/s/ Hein & Associates LLP
Houston, Texas
February 10, 2014
Exhibit 31.1
CERTIFICATION
I, John W. Chisholm, certify that:
1. I have reviewed this Annual Report on Form 10-K of Flotek Industries, Inc.;
2. To the best of my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. To the best of my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
/s/ JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer and
Chairman of the Board
Date: February 10, 2014
Exhibit 31.2
CERTIFICATION
I, H. Richard Walton, certify that:
1. I have reviewed this Annual Report on Form 10-K of Flotek Industries, Inc.;
2. To the best of my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. To the best of my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: February 10, 2014
/s/ H. RICHARD WALTON
H. Richard Walton
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Flotek Industries, Inc. (the “Company”) on Form 10-K for the year
ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer and
Chairman of the Board
Date: February 10, 2014
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Flotek Industries, Inc. (the “Company”) on Form 10-K for the year
ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: February 10, 2014
/s/ H. RICHARD WALTON
H. Richard Walton
Chief Financial Officer
2013 Annual Report
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Flotek Industries, Inc.
10603 W. Sam Houston Pkwy N
Suite 300
Houston, TX 77064