Energy
Chemical Technologies
Energy Chemical Technologies focus on
developing, manufacturing and distributing a
wide array of specialty chemicals used in both
primary and secondary recovery efforts. Our unique
and patented chemistries are used in cementing,
stimulation, acidizing, drilling and production. Our best-
in-class Complex nano-Fluid® chemistries have been
shown to meaningfully increase production and well
integrity in unconventional tight gas and oil formations.
Moreover, our advanced reservoir modeling
capabilities provide tailored chemistry solutions to
address clients’ proprietary completion and
production challenges. We also provide Logistics
Technologies which manage automated
material handling,
loading facilities and
blending capabilities for energy
services companies and build
bulk storage facilities.
Drilling
Technologies
D r i l l i n g Te c h n o l o g i e s f o c u s o n
designing, manufacturing and distributing a
diverse inventory of downhole drilling
equipment with applications in oil and gas
drilling as well as mining, water and industrial
drilling applications.
In addition, we provide
directional drilling telemetry services through
our best-in-class Teledrift® technologies.
We continue to introduce new product
innovations including TelePulse™
and Stemulator®.
Flotek’s
Technology Portfolio
Flotek’s portfolio consists of
four primary
technology groups: Energy Chemical Technologies;
Drilling Technologies; Production Technologies; and
Consumer & Industrial Chemical Technologies. Our Energy
Chemical Technologies add value in the drilling, completion and
production stages of oil and gas wells; our Drilling Technologies
provide solutions during the drilling stage of oil and gas wells; and
our Production Technologies address a number of production
challenges for oil and gas companies. Our diverse mix of products
and services touch every stage of the life cycle of a well. Through
the acquisition of Florida Chemical, we have added Consumer &
Industrial Chemical Technologies which provide cutting-edge,
citrus-based chemistry to the flavor, fragrance and industrial
services industries. While each technology requires unique
technical expertise, all of our
technologies share a
commitment
to our vision to provide best-in-class
technology, cutting-edge innovation to address
the ever-changing challenges of our
customers and exceptional
customer service.
Consumer
and Industrial Chemical
Technologies
Consumer and Industrial Chemicals
Technologies was added with the acquisition
of Florida Chemical. The Company is the
largest processor of citrus oils in the world.
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
fragrance
companies, and companies providing
household and industrial cleaning
beverage and food companies,
products.
Production
Technologies
Our Production Technologies are
focused on assembling, distributing,
installing and servicing a broad
s p e c t r u m o f p u m p i n g s y s t e m
c o m p o n e n t s i n c l u d i n g e l e c t r i c a l
s u b m e r s i b l e p u m p s ( E S P s ) , g a s
separators and other services that largely
support coal bed methane (CBM)
production. In addition, our Petrovalve™
p a t e n t e d p r o d u c t i o n v a l v e a n d
components are used by a plethora of oil
and gas producers in downhole
p r o d u c t i o n a s s e m b l i e s . O u r
Production Technologies continue to
evolve to meet the needs of both
maturing oil and natural gas
production.
Fellow Flotek Shareholder:
m
On behalf of my colleagues at Flotek Industries I am
pleased to report to you on the progress of your
Company.
By nearly every account, 2014 was an extraordinary
year for Flotek as we worked diligently to make a
difference for all our shareholders. Record revenue and
d
income combined with new market opportunities are
certainly important attributes of a very successful year
for your Company.
n
That said, while it is simple to measure our success in
t
dollars and cents, it is the unwavering dedication and effort of the
Flotek team of which I am most proud. The day-in and day-out
belief by each member of the Flotek team – from Wyoming to
Williston, Midland to Marlow and new frontiers beyond our borders – that they can make a
difference for all our stakeholders: our clients; our team members and their communities; the
environment; and, most importantly, you, our shareholder, is the most important measure of
our success.
f th
While I take this opportunity to share with you Flotek’s achievements in the year just past, I
realize there is little time for celebration as the current challenges and our plans to navigate
through the tumult are at the forefront of each and every member of the Flotek community.
Rest assured, we are prepared for the challenges ahead and believe your Company will
emerge as an even stronger leader in oilfield technology as the cycle evolves in the coming
months.
Such confidence comes from our belief that Flotek remains extremely well positioned as a
leader in an energy services renaissance that will be driven by a new wave of technological
innovation, focused on customized chemistry that continues to improve production in new and
existing wells and is conscious of the importance of environmental stewardship, a sense of
obligation to leave the path of energy exploration as untarnished as possible, proving that
energy development and environmental principles can coexist.
While the path to technological change and innovation may be circuitous and cumbersome, the
reward makes the journey not only necessary but incredibly rewarding. I am confident that
when the history books are written we will look back on the challenges that are currently before
us and understand they made Flotek stronger, providing an opportunity to further sharpen our
focus on our core competencies, seek opportunities that exploit and expand our key strengths
and gain market share and expand our reputation as a leading innovator of value-added oilfield
technologies.
That said, we are acutely aware of the cyclical nature of our industry and appreciate that we
must live within the realities of our environment. While we are myopically focused on the
protection of liquidity and ensuring the preservation of value for our stakeholders, we will also
be strategic in our quest to grow our business through smart, tactical investments in our
existing businesses as well as extrinsic opportunities that should create long-term value by
adding to our world-class technologies.
It has often been said, “Those who ignore history are bound to repeat it,” a tenet that is
especially prescient at Flotek, especially with those that lived through the chilling days of 2008
and 2009 with your Company. I have pledged since I assumed my role as Flotek’s leader that
we would never again put your Company in that financial position (or even close) and I remain
committed to that pledge. While we can’t do anything about cyclical lows in activity and
commodity prices, we can, have and will make certain we do everything possible to ensure
Flotek is one of the strongest oilfield technology companies as we reach the cyclical nadir and
begin to accelerate and grow in the future.
The most important thing we can do in that regard is make sure that Flotek’s financial position
remains strong. I submit to you today that Flotek completed 2014 in its strongest position ever
and we continue to work hard to ensure we maintain a sturdy and durable balance sheet even
as uncertainty envelopes our industry:
• Flotek’s 2014 revenue was $449.2 million, a record for your Company and an increase
of over 21% from 2013 results. Income from Operations was nearly $81 million, an
increase of approximately 38% from 2013; and Net Income was over $53 million, an
increase of nearly 45% from the previous year, all records for your Company.
• Flotek’s Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA, a
non-GAAP measure of financial performance) for 2014 was over $98 million, an
increase of nearly 33% from 2013 levels, another record for Flotek.
• Flotek’s balance sheet ended 2014 as strong as it has been in the history of the
Company. We ended the year with only $8 million drawn on our credit facility, continued
to reduce the balance on our term loan used to finance a portion of our successful
acquisition of Florida Chemical Company and, at the same time repurchased over $10
million of our common equity creating additional value for our continuing shareholders.
In short, our growth combined with our financial stewardship has afforded Flotek a financial
position which many of our oilfield brethren would envy: solid earnings growth, minimal
leverage and exceptional liquidity to not only endure the cyclical uncertainty but to thrive as the
oilfield navigates through uncertainty toward a new cycle of reasonable growth driven by
technology-inspired efficiency.
Our commitment to technology and improving the understanding of how that technology –
especially customized chemistry – makes better wells is no better demonstrated by our
introduction of FracMax™, our patent-pending, cutting-edge software analytical package, last
summer.
Using data from FracFocus, the national hydraulic fracturing chemical registry, and state oil
and gas regulators, FracMax has compiled a database of comprehensive completion inputs
and historical production results, allowing the comparison of what chemistries are used in the
well completion process and the productivity of those wells. In fact, this data is provided to
FracFocus and oil and gas regulators - such as the Texas Railroad Commission or the Kansas
Corporation Commission – by the exploration companies, meaning the analysis is based on
data that our clients have provided to regulators.
The FracMax research staff – as of March, 2015 – has data on over 80,000 wells across the
United States and Canada. Employing time-tested statistical analysis, FracMax provides a
view inside the impact of using Flotek’s Complex nano-Fluid® completion chemistry in a well.
We have long held that the use of CnF® chemistries in well completions provided a significant
economic advantage versus common completion chemistries. However, with FracMax, we can
validate and quantify the advantage. The result: FracMax indicates that firms that used CnF
chemistry in their wells over the course of the past year gained over $8 billion – yes eight
billion – in revenue from incremental production (at $60 oil) versus those companies that chose
not to invest in advanced, customized chemistry. Over time, 230-plus unique clients have
experienced the benefit of our CnF completion chemistries.
The data and results from FracMax have provided a significant step forward in proving the
efficacy of Flotek’s completion chemistry and were key to the growth in our chemistry business
in 2014. In fact, dozens of exploration companies chose to validate CnF chemistries in wells
across North America during 2014 with nearly all becoming repeat customers. And, even with
the challenging commodity price environment, additional companies start new validation
projects every month.
In short, FracMax has transformed the competitive landscape and is quickly creating the
presumption that CnF should be the default completion chemistry in nearly every well across
the country and around the globe. While that doesn’t mean that every exploration company will
adopt CnF without further validations, we believe FracMax has fundamentally changed the
conversation when presenting Flotek’s suite of advanced completion chemistries.
FracMax is another example of Flotek making a difference for its stakeholders, in this case
both our clients and our shareholders. Instead of sitting back and waiting for an uncertain
future to come to us, Flotek is on tomorrow’s horizon, shaping the future of completion
technology, proactively working to create value for clients and shareholders alike. We are
committed to these types of technologies and advanced partnerships as we approach the
challenges of 2015 and beyond.
In fact, FracMax is such an important part of Flotek’s strategy, your Company has personified
the technology in the form of Max, the friendly humanoid that graces the cover of this year’s
Annual Report. Over the course of the next weeks and months, we will continue to bring Max
to life through a series of strategic events. Stay tuned. . .we think there is a pretty good chance
that Max will become nearly ubiquitous in the oil patch in the coming year.
While FracMax is certainly a highlight of the past twelve months, your Company was busy with
a number of other initiatives that we believe added value in the past year and should continue
to do so into 2015 and beyond:
• Early in 2014, Flotek completed the acquisition of SiteLark, LLC, adding a leading
provider of reservoir engineering and modelling services. SiteLark works globally to
develop innovative solutions to enrich reservoir simulation models, build predictive
models for unconventional gas and performs engineering studies
related to fluid characterization, material balance, decline curves
and pressure transient analysis. SiteLark also provides
proprietary software solutions for the petroleum industry
which assists engineers with reservoir simulation,
reservoir engineering and waterflood optimization.
Founded by Dr. Deepankar “Dee” Biswas, SiteLark also
provides engineering services for Enhanced Oil
Recovery projects and serves as a provider of in-depth
modelling and evaluation services for EOGA, a company
acquired by Flotek in 2013 focused on chemistry and
polymer solutions for the Enhanced Oil Recovery market.
Dee’s work has been instrumental not only in growing our EOR
business platform but has been immensely valuable in
modelling the impact of Flotek’s chemistries in reservoir systems.
“While the path
to technological
change and innovation
may be circuitous and
cumbersome, the reward
makes the journey not
only necessary but
incredibly
rewarding.”
•
•
In April, Flotek teamed with drilling-fluid guru Tony Rea to purchase intellectual property
that expanded the use of Flotek’s CnF into drilling applications. Tony’s decades of
experience in drilling fluids has created a series of chemistries that utilize Flotek’s CnF
formulations to improve the performance of drilling fluids in a number of conventional
and unconventional drilling programs. In partnership with Tony, who signed a long-term
consulting agreement with Flotek, we have increased our presence in the drilling fluids
market, both domestically and in new international markets. We expect Tony’s
knowledge and reputation, combined with our chemistries and research capabilities, to
grow meaningfully, even in a more challenging market.
In June, Flotek introduced a new set of citrus-based chemistries intended to replace
Xylene in oil and gas applications. Flotek’s solvents, based on the Company’s technical
grade d-limonene, is a double-bonded hydrocarbon produced from the skins of oranges.
Laboratory and commercial validations show that d-limonene – an environmentally safe
and renewable compound – is as effective as Xylene and other BTEX-type solvents in
eviscerating pollutants that stifle production in oil and gas wells. Xylene – a by-product
of crude oil – is a known environmental hazard, a ground water contaminant and
suspected of numerous negative impacts on human and animal health. In contrast, the
U.S. Food and Drug Administration has determined d-limonene to be Generally
Regarded as Safe (“GRAS”) and has been given the “Designated for the Environment”
label by the U.S. Environmental Protection Agency. As an agricultural by-product, d-
limonene is both sustainable and bio-renewable. Flotek continues to refine and advance
this environmentally friendly chemistry and we believe, over time, it will become the
preferred solvent in production chemistries.
•
In October, Flotek announced plans to create a new, re-imagined Research &
Innovation Leadership Center. The center will be a 50,000-plus square foot facility
located in the Sam Houston Business Park in Northwest Houston. The facility, will
combine the Company's applied research and conceptual innovation teams in their
development of next-generation chemistries for the oilfield. Our vision is to create a
center for chemistry excellence that leverages our world-class scientific talent through
state-of-the-art laboratories, provides our customers with an unparalleled tactile
experience that literally creates solutions to drilling and production challenges as they
watch and allows us to validate the efficacy of our chemistries and communicate the
effectiveness with impact. We expect to complete our new facility in late 2015.
In addition to these exciting developments, we made key additions to the Flotek leadership
team:
•
•
•
In January, we added David McMahon to the Flotek team to head the Company’s
reimagined Production Technologies division. David spent over two decades in the
artificial lift industry with various units of Baker Hughes. David was instrumental in
developing Baker Hughes' artificial lift presence in the Williston Basin, one of the most
dynamic lift markets in the country. David has already had an impact on the focus of
our Production Technologies business, including being the catalyst for our recent
acquisition of International Artificial Lift which we believe will be a key growth
component of David’s business in the coming months.
In April, Flotek appointed Amerr Mahgoub as Vice President, Middle East Business
Development. As the leader of Flotek’s Middle Eastern business development and
marketing team, Amerr is focused on development of new and existing markets for
Flotek. Amerr has over 25 years in the oil patch. Until joining Flotek, Amerr spent his
entire career with Schlumberger, concluding his tenure as a key relationship manager
between Schlumberger and Saudi Aramco. His understanding of the Middle East and
relationship with Aramco have already served Flotek well.
In January, 2015 Flotek introduced Stephen A. Marinello, PhD as Director of CnF
Applied Technology, a newly created position to counsel Flotek clients on the benefits of
CnF and new applications for Flotek’s unique chemistry systems. Steve has spent over
two decades exploring and applying new chemistry technologies in the oilfield, including
stints in academia and, most recently, as a key member of Shell’s completion team
where he was charged with analyzing field performance of mobility enhancement fluids
and completion systems. His academic and commercial research focused on
completion systems combined with his knowledge of Flotek’s chemistry systems and
our SiteLark modelling capabilities is a perfect fit for the Flotek team. Steve will be an
integral part of our team that will espouse the benefits of using CnF in well
recompletions, a facet of our business we believe will be a major contributor to our
success in 2015 and beyond as we continue to emphasize the impact of chemistry in
the reservoir.
While these initiatives and strategic decisions are important to the success of Flotek, none
would have been possible without the 500-plus members of the Flotek team. Too often, annual
corporate missives leave the reader to wonder just exactly who really makes things happen at
the Company.
Let me be crystal clear: the success of Flotek is the result of the hard work and untiring efforts
of a group of people who believe they can shape the future. As a leadership team, it is
incumbent on us to communicate our vision, challenge the spirit and ensure our team has the
tools to exceed even their wildest expectations.
In a more challenging environment, it is also incumbent on leadership to make the decisions
necessary to ensure the future of the enterprise, balance conservation and opportunity and
position the Company appropriately to be prepared to exploit opportunities as the cycle
evolves. While those decisions can be difficult, I am certain we have the right people in the
right places to maximize our opportunities in this challenging environment. Moreover, we will
continue to make strategic investments in technology that will ensure we work smarter and
harder to create more efficient outcomes in the coming months.
We do believe opportunities will present themselves in many ways, both inside and outside our
current footprint. We will continue to be deliberate in evaluating external opportunities, using
what we’ve learned in the past year to ensure any transaction provides strategic advantages
while, at the same time, is a compelling value for your Company. Moreover, especially in this
environment, we will continue to carefully scrutinize the cultural fit of any potential partner to
avoid the integration challenges that can result from an uneasy feeling of needing to make
something happen when staying the course is the right thing to do.
Finally, an important part of a Company’s culture and ethos is giving back. While I am
incredibly proud of our commercial success, I am just as proud of Flotek’s decisions to make a
difference in the communities we serve. Whether it is our sponsorship of Veterans’ causes, the
Red Cross, MD Anderson Children’s Hospital or Eric Dickerson’s efforts to help boys who are
growing up without their fathers, Flotek is absolutely committed to giving back, being good
stewards of our communities and making a difference in the lives of members of our
communities. Without that commitment, our commercial efforts seem less important. Our
commitments to our communities give our daily efforts a greater sense of meaning and
purpose. That’s what making a difference is all about.
As I have mentioned before when I look at my last five years as the leader of your Company, I
marvel at how far our team has come in such a short period of time. And, my conclusion at this
time last year may be even more appropriate today.
If we were able to accomplish so much starting with so little, imagine what we can accomplish
with the resources available to Flotek today. That, indeed, is our challenge in the coming year:
to harness the resources we have developed to create more opportunities to make a difference
for all our stakeholders in the coming months.
As I have told the Flotek team in recent weeks, while the challenges and uncertainties in front
of us are significant, they pale in comparison to what we faced in 2008 and 2009. Moreover,
our team is the most talented in the history of Flotek. Given our track record of addressing,
overcoming and excelling during periods of tumult, I am both confident and excited that the
best is yet to come for Flotek and its stakeholders, especially you, our shareholders.
Finally, I know each of you will join me in acknowledging and thanking Joe Graham, a friend
and long-time Flotek team member for his service to your Company. Joe, the controller at
CESI, our chemistry research and production subsidiary, from its infancy is retiring this month
after a decade-plus of service. While many of you may not have interacted with Joe, his steady
demeanor and common-sense approach to the accounting issues of a rapidly growing
company kept the Marlow trains running on time. Joe was an integral part of the positive
evolution of our chemistry production hub in Marlow and a trusted and reasoned voice in our
sometimes frenzied business.
Colleagues like Joe are what make Flotek a special place. Thank you, Joe, for your service
and for making a difference during your tenure at Flotek.
I conclude this year’s missives with the same pledge I have made each year since becoming
the President of your Company: Along with all of my colleagues at Flotek, I pledge to you, our
shareholders, that everything we do will be based on our belief that it is in the best interest of
our stakeholders. First and foremost, we will work tirelessly to add value and continue to earn
your trust.
In short, we will make a difference.
Thank you for your continued interest and support of Flotek.
With appreciation,
John W. Chisholm
Chairman, President and Chief Executive
Officer
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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, 2014
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 È No ‘
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, 2014 (based on the
closing market price on the NYSE Composite Tape on June 30, 2014) was approximately $1,527,000,000. At
January 16, 2015, there were 53,364,905 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 2015 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
6
18
18
19
19
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
23
24
42
44
81
81
81
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
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.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82
82
82
82
82
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
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
“continue,” “intend,” “expect,” “plan,” “forecast,”
“anticipate,”
“believe,”
as
that
future
guarantees
“project” and similar expressions, or future-tense or
conditional constructions such as “will,” “may,”
the negative
“should,” “could” and “would,” or
thereof or other variations thereon or comparable
terminology. The Company cautions
these
statements are merely predictions and are not to be
performance.
of
considered
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
those
statements include, but are not
discussed 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”).
limited to,
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 global 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
that are sold in consumer and
other products
industrial markets.
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.
to those reports
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
furnished
filed or
amendments
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, (the “Exchange Act”) are
posted to the Company’s 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 these terms is not intended to
connote any particular corporate status or relationship.
Recent Developments
In May 2013,
the Company acquired Florida
Chemical Company, Inc. (“Florida Chemical”) for a
total purchase price of $106.4 million. Florida
Chemical is one of the world’s largest processors of
citrus oils and is a pioneer in solvent, chemical
synthesis, and flavor and 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
1
and gas industry. This 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. The
acquisition expands the Company’s business into
consumer and industrial chemical technologies which
provide products for the flavor and fragrance industry
and
industry. These
are used by food and beverage
technologies
companies,
fragrance companies, and companies
providing household and industrial cleaning products.
chemical
specialty
the
In November 2013, the Company signed a shareholder
agreement with Tasneea Oil and Gas Technologies,
LLC (“Tasneea”)
an Omani Limited Liability
Company, to form Omani based Flotek Gulf, LLC
(“Flotek Gulf”) and Flotek Gulf Research, LLC
(“Flotek Gulf Research”). During the fourth quarter of
2014, Flotek and Tasneea transferred initial capital
into Flotek Gulf and Flotek Gulf Research. Flotek Gulf
and Flotek Gulf Research will develop and market
specialty chemistries for the oil and gas industry
throughout the Middle East and North Africa. In the
coming year, Flotek Gulf expects to construct a
manufacturing facility designed to produce chemical
products including Flotek’s patented and proprietary
products for distribution throughout the region.
In January 2014, the Company acquired 100% of the
membership interest in Eclipse IOR Services, LLC
(“EOGA”), a leading Enhanced Oil Recovery design
and injection firm. The Company paid $5.3 million,
net of cash received,
in cash consideration 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 has been combined with the Company’s
existing EOR products and services.
stock.
In April 2014, the Company acquired 100% of the
membership interests in SiteLark, LLC (“SiteLark”)
for $0.4 million and 5,327 shares of the Company’s
reservoir
common
engineering and modeling services for a variety of
hydrocarbon
include
proprietary software which assists engineers with
engineering and
reservoir
waterflood optimization.
applications.
simulation,
reservoir
SiteLark
provides
services
Its
the Company launched its patent
In May 2014,
pending FracMaxTM software
technology that
allows the Company to quantitatively demonstrate
the
the benefits associated with the use of
Company’s patented and proprietary Complex nano
FluidTM chemistries. The Company has integrated
the use of the FracMaxTM software technology into
its sales and marketing activities resulting in a
significant increase in interest in the Company’s
Complex nano-FluidTM chemistries.
Description of Operations and Segments
20
operates
domestic
over
and
Flotek
in
international markets,
including the Gulf Coast,
Southwest, West Coast, Rocky Mountains,
Northeastern and Mid-Continental regions of the
United States (the “U.S.”), Canada, Mexico, Central
America, South America, Europe, Africa, Middle
East, Australia and Asia-Pacific.
Chemical
Technologies,
The Company has four strategic business segments:
Energy Chemical Technologies, Consumer and
Industrial
Drilling
Technologies and Production Technologies. The
Company offers competitive products and services
derived from technological advances, some of
which are patented, that are reactive to industry
demands
and international
markets.
in both domestic
Financial information about operating segments and
geographic concentration is provided in Note 17 –
“Segment and Geographic Information” and in Part
II,
and
“Financial
Supplementary Data” in this annual report.
Statements
Item 8
–
Information about the Company’s four operating
segments is below.
Energy Chemical Technologies
segment
The Energy Chemical Technologies
designs, develops, manufactures, packages and
markets chemicals for use in oil and gas (“O&G”)
well drilling, cementing, completion, stimulation
and production activities designed to maximize
recovery in both new and mature fields, including
enhanced and improved oil recovery markets. These
specialty chemicals possess enhanced performance
characteristics and are manufactured to withstand a
broad range of downhole pressures, temperatures
and other well-specific conditions to be compliant
2
and
enhancement
with customer specifications. This segment has two
operational
laboratories: (1) a technical services
laboratory and (2) a research and innovation
laboratory. Each focuses on design improvements,
development and viability testing of new chemical
formulations,
of
continued
existing products. Chemicals branded Complex
nano-Fluid® technologies (“CnF® products”) are
patented both domestically and internationally and
are proven strategically cost-effective performance
additives within both oil and natural gas markets.
The CnF® products mixtures are environmentally
friendly, stable mixtures of oil, water and surface
active agents which organize molecules into nano
structures. 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 are 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 some of the most stringent oil
field environmental standards 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 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.
its
patent
segment
launched
pending
The
FracMaxTM software technology in 2014. The
FracMaxTM application is an innovative software
technology
to
quantitatively demonstrate the benefits associated
with the use of
the segment’s patented and
proprietary Complex nano-Fluid® chemistries.
the Company
allows
that
Consumer and Industrial Chemical Technologies
and
Industrial
Consumer
The
Chemicals
Technologies (“CICT”) segment, was added in
conjunction with
of Florida
Chemical in May 2013. This segment sources citrus
oil domestically and internationally and is one of
the largest processors of citrus oils in the world.
acquisition
the
Products produced from processed citrus oil include
(1) high value compounds used as additives by
companies in the flavors and fragrances markets
and (2) environmentally friendly chemicals for use
in the oil & gas industry and numerous other
industries around the world. The CICT segment
designs, develops and manufactures products that
are sold to companies in the flavor and fragrance
industry. These
industry and specialty chemical
technologies are used within food and beverage,
fragrance, and household and industrial cleaning
products industries.
Drilling Technologies
The Drilling Technologies segment
is a leading
provider of downhole drilling tools for use in
oilfield, mining, water-well and industrial drilling
activities. This segment manufactures, rents, sells,
inspects and assembles 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 a number of
international
markets. Rental
include stabilizers, drill
collars, reamers, wipers, jars, shock subs, wireless
survey, measurement while drilling (“MWD”)
and mud-motors.
tools
tools,
Equipment
includes mining
primarily
equipment, cementing accessories and drilling
motor components. The Company remains focused
on product marketing for this segment in all regions
of
international
markets through both direct and agent-based sales.
the U.S., as well as in select
Stemulator®
sold
tools
Production Technologies
The Production Technologies segment provides
pumping system components, electric submersible
pumps (“ESPs”), gas separators, production valves,
and complementary services. These artificial
lift
products satisfy the requirements of traditional oil
and natural gas production and coal bed methane
markets by assisting natural gas, oil and other fluids
movement
from the producing horizon to the
surface. Patented products within the Company’s
pumping
PetrovalveTM product
efficiency in horizontal well completions as well as
in heavy oil wells and wells with high liquid to gas
ratios. PetrovalveTM products placed horizontally
increase flow per stroke and eliminate gas locking
of traditional ball and seat valves that traditionally
require more maintenance. The patented gas
optimize
line
separation technology is particularly effective in
coal bed methane production, efficiently separating
gas and water downhole as well as ensuring
solution gas is not lost in water production. The
Company’s products are sourced internationally and
domestically, assembled at domestic locations and
distributed globally.
Seasonality
certain working
Overall, operations are not significantly affected by
seasonality. While
capital
components build and recede throughout the year in
conjunction with established purchasing and selling
cycles that can impact operations and financial
position, these cycles have not been significant to
date. The performance of certain services within
each of
is
susceptible to both weather and naturally occurring
phenomena,
limited to the
following:
the Company’s segments, however,
including, but not
‰
‰
‰
‰
‰
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
thaw and resulting restrictions that
impact
activity levels;
the timing and impact of hurricanes upon
coastal and offshore operations;
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 Production
Technologies operations in the first or second
quarters of the year; and
adverse weather
impact
CICT business unit.
in Florida and Brazil can
the availability of citrus oils for the
Product Demand and Marketing
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
arrangements.
certain
Established customer relationships provide repeat
sales opportunities within all segments. While the
contractual
agency
3
Company’s primary marketing efforts
remain
focused in North America, a growing amount of
resources and effort are focused on emerging
international markets, especially in the Middle East
and North Africa (“MENA”) as well as South
In addition to direct marketing and
America.
relationship
also
markets products and services through the use of
third party agents in Mexico, Central America,
South America, Europe, Africa, the Middle East,
Australia, and Asia-Pacific.
the Company
development,
Customers
and cosmetic
cleaning product
The Company’s customers primarily include major
integrated oil and natural gas companies, oilfield
service companies, independent oil and natural gas
companies, pressure pumping service companies,
international supply chain management companies,
national and state-owned oil companies, household
companies,
and commercial
companies, and food
fragrance
manufacturing companies. For
the year ended
December 31, 2014,
the Company had three
customers that accounted for 16%, 7% and 6% of
consolidated revenue, respectively. For the years
ended December 31, 2013 and 2012, the Company
had a single customer that accounted for 16% and
16% of consolidated revenue,
In
aggregate, the Company’s largest three customers
collectively accounted for 29%, 30% and 35% of
consolidated
ended
December 31, 2014, 2013 and 2012, respectively.
respectively.
revenue
years
the
for
Research and Innovation
is
engaged in research
The Company
and
innovation activities focused on the improvement of
existing products and services,
the design of
reservoir specific, customized chemistries, and the
development of new products, processes and
services. For the years ended December 31, 2014,
2013 and 2012, the Company incurred $5.0 million,
$3.8 million and $3.2 million,
respectively, of
research and innovation expense. In 2014, research
and innovation expense was approximately 1.1% of
consolidated revenue. The Company expects that its
2015 research and innovation investment will
increase commensurate with the growth of the
business.
4
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
commercial
and methods
significance and that qualify for patent protection.
The decision to pursue patent protection is
dependent upon several factors, including whether
patent protection can be obtained, cost-effectiveness
and alignment with operational and commercial
interests. The Company believes its patent and
trademark portfolio, combined with confidentiality
agreements,
trade secrets, proprietary designs,
are
manufacturing
necessary and appropriate to protect its intellectual
property and ensure continued strategic advantages.
The Company currently has 15 issued patents and
over four dozen pending patent applications on
various chemical compositions and methods as well
as various downhole tools, including its ProSeries™
tools. In addition, the Company also has several
and pending trademark
registered trademarks
applications covering a variety of its goods and
services.
operational
expertise,
and
Competition
upon
ability
the Company’s
The ability to compete in the oilfield services
industry and the consumer and industrial markets is
dependent
to
differentiate products and services, provide superior
quality and service, and maintain a competitive cost
structure. Activity levels in the oil 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
which could affect
the Company’s revenue and
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 citrus-based terpene is a major
the Company’s CnF®
feedstock for many of
the Company utilizes
In addition,
chemistries.
sources when it
from other natural
terpenes
is
such formulas
the efficacy of
determines
appropriate. The Company is currently examining
the potential of varying terpene streams in several
proprietary chemistries. It
is also assessing the
viability of removing trace amounts of “BTEX”
(benzene,
and xylene)
compounds from such terpenes to ensure they meet
Flotek’s rigorous environmental standards.
ethylbenzene,
toluene,
solvent
and other
The Company faces competition from other citrus
processors
sources. Other
terpenes can provide an effective substitute to the
Company’s citrus-based terpenes, although, without
refinement, are generally of lower quality. Such
terpenes can be cheaper than citrus terpenes, but, as
noted above, can contain “BTEX” compounds
(benzene, toluene, ethylbenzene, and xylenes), and
other volatile organic compounds that have varying
degrees of toxicity. The Company’s chemistries are
intended to replace these undesirable qualities.
Management
environmental
constituents will continue to promote “BTEX”
substitutes, which
of
substitution in ecologically sensitive applications
from these competitors.
diminishes
believes
threat
that
the
Raw Materials
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
to
available from limited sources. Disruptions
5
suppliers could materially impact sales. The prices
paid for raw materials vary based on energy, steel,
citrus, and other commodity price fluctuations,
foreign
tariffs, duties on imported materials,
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.
and
Production Technologies segments purchase raw
from
materials and steel on the open market
numerous suppliers. When able, the Company uses
multiple
and
both
internationally, for all raw materials purchases.
The Drilling
Technologies
domestically
suppliers,
Drilling Technologies maintains a three to six
month supply of mud-motor inventory parts sourced
from international and domestic suppliers, and
Drilling Technologies and Production 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.
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.,
the Company must
and
regulations which include, among others:
comply with laws
‰
‰
‰
‰
‰
the Comprehensive Environmental Response,
Compensation and Liability Act;
the Resource Conservation and Recovery Act;
the Federal Water Pollution Control Act;
the Toxic Substances Control Act; and
the Affordable Care Act.
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
cost of
order
to quantify the
in
property
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
segments are
Industrial Chemical Technologies’
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.
and
claims,
litigation
From time to time, the Company may be party 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
a significant adverse effect on the Company’s
consolidated
of
operations.
financial
position
results
or
Employees
At December 31, 2014,
the Company had 561
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
Company’s website
at
The
www.flotekind.com. Annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
accessible
is
reasonably practicable,
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.
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
2014 Annual Chief Executive Officer
Certification required by the NYSE was submitted on
May 13, 2014. 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 2015 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. Readers of this report should
not consider any descriptions of these risk factors to
be a complete set of all potential risks that could
affect Flotek. These factors should be carefully
information
considered together with the other
contained in this Report and the other reports and
materials filed by us with the SEC. Further, many of
these risks are interrelated and could occur under
similar business and economic conditions, and the
occurrence of certain of them may in turn cause the
emergence or exacerbate the effect of others. Such a
combination could materially increase the severity of
the impact of these risks on our business, results of
operations, financial condition, or liquidity.
6
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
statements also contain suppositions
regarding
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
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.
and
and
and
gas,
natural
operating
The Company is dependent upon customers’
to make
willingness
capital
expenditures
for exploration, development and
production of oil and natural gas in both the North
American
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
Industry conditions are influenced by
services.
numerous factors over which the Company has no
control, including the supply of and demand for oil
and
international
domestic
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
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 decline in the demand for, or
the price of,
the
negatively affect
some of
Company’s
services. Domestic
and
demand for oil and natural gas could also be
customers’
products
activity
and other
uniquely affected by public attitude regarding
drilling in environmentally sensitive areas, vehicle
emissions
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.
environmental
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,
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. Volatile economic conditions could
exploration and production
weaken customer
expenditures,
for
Company products and services and a significant
adverse effect on the Company’s operating results.
It is difficult to predict the pace of any industry
growth, the direction of oil and natural gas prices,
whether the economy will worsen, and to what
extent these conditions could affect the Company.
demand
reduced
causing
Reduced cash flow and capital availability could
the financial condition of the
adversely impact
in
Company’s customers, which could result
customer
or
project modifications,
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.
delays
7
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:
•
•
•
•
•
•
•
•
•
•
and
general
demand for energy reactive to worldwide
population growth, economic development
and
business
economic
conditions;
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
weather conditions.
impacting energy
advances
The Company’s revolving credit facility and term
loan have variable interest
that could
increase.
rates
At December 31, 2014, the Company had a $75
million revolving credit facility commitment, of
which $8.5 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
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, 2014. 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
lending
base
credit
revolving
The Company borrowed $50.0 million under a term
loan on May 10, 2013. The interest rate on the term
loan varies based on the level of borrowing under
range
the
(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, 2014. At December 31, 2014, $35.5
million was outstanding under the term loan.
facility. Rates
There can be no assurance that the revolving credit
facility and the term loan will not experience
significant interest rate increases.
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
or
systems
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,
the Company’s
be
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;
8
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 services,
the Company’s revenue and profitability could suffer.
retail
cleaning
products,
that
Consumer and industrial chemical markets
purchase the Company’s citrus based products are
largely influenced by consumer preference and
regulatory requirements. While citrus based beverage
fine
flavorings,
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
the
Company’s financial performance could be impacted.
regulations,
and
The Company may pursue strategic acquisitions,
which could have an adverse impact on the
Company’s business.
that
risks
could adversely affect
The Company’s historical and potential acquisitions
involve
the
Company’s business. Negotiations of potential
integration of newly acquired
acquisitions or
businesses could divert management’s attention from
other business concerns as well as be cost prohibitive
and time consuming. Acquisitions could also expose
risks
the Company to unforeseen liabilities or
businesses.
associated with
or
difficulties
Unforeseen
to
related
operational
acquisitions could result
in diminished financial
performance or require a disproportionate amount of
the Company’s management’s
and
resources. Additional acquisitions could result in the
commitment
the
of
realization of anticipated returns.
resources without
new markets
attention
capital
•
•
•
•
•
increased administrative burdens;
lack of customer retention;
technological obsolescence;
technological, communication
infrastructure,
and logistical problems associated with large,
expansive operations; and
failure to effectively integrate acquisitions,
joint ventures or strategic alliances.
If the Company fails to manage potential difficulties
successfully,
including increased costs associated
with growth, the Company’s operating results could
be adversely impacted.
The Company’s ability to grow and compete could
be adversely affected if adequate capital
is not
available.
is dependent,
The ability of the Company to grow and compete is
reliant on the availability of adequate capital. Access
to capital
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 restrict the Company’s various capital
transactions or participation in various business
acquisitions and combinations. The Company cannot
guarantee cash flows
from 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.
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
have historically resulted in, and will likely continue
to result in, substantial improvements in the scope
and quality of oilfield chemicals, drilling and
lift products and services function and
artificial
the Company’s future
performance. Consequently,
9
Unforeseen contingencies such as litigation could
adversely
financial
condition.
the Company’s
affect
Company to liabilities that could adversely affect
the Company’s business, financial condition, and
results of operations.
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
the Company’s business
not adequately protect
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
is cost-prohibitive. Consequently,
available or
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
10
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.
to
publicly
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
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.
disclose
certain
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
operating
compliance
restrictions, each of which would have a negative
impact on the Company’s operations.
additional
costs
and
Changes in regulatory compliance obligations of
critical
impact our
operations.
suppliers may adversely
11
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
to adopt additional disclosure requirements related
to certain minerals sourced from the Democratic
Republic of Congo and surrounding countries, or
“conflict minerals,”
for which such conflict
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 use
some of
in their production
processes.
these materials
contracted
or
to
the
requirements
compliance with
In 2014,
the Company established management
systems and processes and completed due diligence
in
of
Section 1502. In May 2014 the Company filed its
first annual Conflict Minerals Report with the SEC.
conducting Conflict
Future
for
Minerals due diligence may result
in significant
increased costs to the Company. Furthermore,
failure of key suppliers to provide evidence of
conflict free materials could impact the Company’s
ability to acquire key raw materials and/or result is
higher costs for those raw materials.
requirements
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
the
security measures to establish and protect
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
similar products or
of
which the Company’s products and services are
manufactured or marketed may not protect
the
Company’s proprietary rights to the same extent as
the U.S. Finally, parties may
do the laws of
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.
other
property
intellectual
the Company,
The Company is exposed to allegations of patent
infringement.
and
Furthermore, the Company could become involved
in costly litigation or proceedings regarding patents
or other intellectual property rights. If any such
the
claims are asserted against
Company could seek to obtain a license under the
third party’s intellectual property rights in order to
mitigate 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 Company’s reputation. The
award of damages,
royalty
including material
the entry of an injunction order
payments, or
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 17.6% of the
Company’s 2014 annual revenue. The Company
and its customers are subject to risks inherent in
doing business outside of the U.S., including:
12
•
•
•
•
•
•
•
•
or
total
governmental instability;
corruption;
war and other international conflicts;
civil and labor disturbances;
requirements of local ownership;
partial
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
or appropriation of property without
fair
compensation.
expropriation
or
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.
the Company’s
grows. Further,
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
with international laws and regulations could become
more complex and expensive thereby creating
international
increased risk as
business
the U.S.
portfolio
periodically enacts laws and imposes regulations
prohibiting or restricting trade with certain nations.
The U.S. government could also change these laws
or enact new laws that could restrict or prohibit the
Company from doing business in identified foreign
countries. The Company conducts, and will continue
to conduct business in currencies other than the U.S.
dollar. Historically, the Company has not hedged
against foreign currency fluctuations. Accordingly,
the Company’s profitability could be affected by
fluctuations in foreign exchange rates.
The Company has no control over, and can provide
no assurances that future laws and regulations will
the Company’s ability to
not materially impact
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.
as
for
are
upon
largest
dependent
production
customers
revenue
The Company has critical customer relationships
which
and
development activity related to a handful of
customers. Revenue derived from the Company’s
a percentage of
three
consolidated
ended
December 31, 2014, 2013 and 2012, totaled 29%,
30% and 35%, 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.
years
the
Failure to collect for goods and services sold to
key customers could have an adverse effect on the
Company’s financial results,
liquidity and cash
flows.
The Company performs credit analysis on potential
domestic customers, however credit analysis does
not provide full assurance that customers will be
willing and/or able to pay for goods and services
purchased
from the Company. Furthermore,
collectability of international sales can be subject to
the laws of foreign countries which may provide
more limited protection to the Company in the
event of a dispute over payment. Since sales to
domestic and international customers are generally
made on an unsecured basis,
there can be no
assurance of collectability. If one or more major
customers are unwilling or unable to pay its debts to
the Company, it could have an adverse effect of the
Company’s financial
liquidity and cash
results,
flows.
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.
Materials used in servicing and manufacturing
operations as well as those purchased for sale are
from
generally available on the open market
multiple
and
costs
transportation of
to Company
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;
Acquisition
raw materials
13
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
Drilling Technologies and Production Technologies
segments purchase critical raw materials on the
open market and, where able,
from multiple
suppliers, both domestically and internationally.
that
inventory parts
The Company maintains a three- to six-month supply
of critical mud-motor
the
Company sources from China. This inventory stock
position approximates the lead time required to
secure these parts in order to avoid disruption of
service to the Company’s customers. The Company’s
inability
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 2015 business plan,
the Company is
actively managing and developing relationships with
back-up parts and service suppliers.
reasonably
secure
priced
to
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
customers’ 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
to withstand
industry
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
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
The Company depends on the continued service of
the Chief Executive Officer and President, the Chief
Financial Officer,
the Executive Vice President,
Operations, and the Executive Vice President,
Research and Development, who possess significant
expertise and knowledge of the Company’s business
the Chief Executive
and industry. Furthermore,
Officer and President serves as Chairman of the
Board of Directors. The Company has entered into
employment agreements with all of
these key
members; however, at December 31, 2014 the
Company only carries key man life insurance for the
Chief Executive Officer and the Executive Vice
President of Operations. Any loss or interruption of
the services of key members of the Company’s
management
the
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
reduce
could
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
Company to provide reliable financial
reports,
effectively prevent fraud and operate successfully as
a public company. If the Company cannot provide
reliable financial reports or effectively prevent fraud,
the Company’s reputation and operating results could
be harmed. If the Company is unable to maintain
effective disclosure controls and procedures and
internal
the
Company may not be able to provide reliable
controls over
reporting,
financial
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 information, which
could negatively affect
the 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
expansion
operations
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
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.
long-term nature
of many
14
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
materials. As
decreases,
consumer
companies not only
they also may relax their
consume less solvent,
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
the Company’s
financing costs
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 Company’s products and services. Also,
the
could
credit
significantly impact the financial condition of some
customers over a prolonged period,
leading to
business disruptions and restricted ability to pay for
services. The
the Company’s
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
affect
financial
the Company’s
condition, and results of operations.
business,
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.
15
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
greater
companies
possess
financial
the
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
their products and
suppliers that decide to sell
services directly to the Company’s customers. As a
result of
the Company could
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
(“VOC”) exist in many states and/or communities
which limit demand for certain products. Although
citrus oil is considered a VOC, its health, safety,
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
activism
preferred VOC,
against hydraulic fracturing or other regulatory or
legislative actions by governments could potentially
increased consumer
in materially reduced demand for
the
result
Company’s products
and could
adversely affect the Company’s business, financial
condition, and results of operations.
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
the work, workers could
demanding nature of
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
addition,
the cost of attracting and retaining
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.
and
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
equipment
in
facilities,
transportation of products and materials, and loss of
productivity.
the Company’s customers are
unable to operate or are required to reduce
operations due to severe weather conditions, and as
a result curtail purchases of
the Company’s
products and services,
the Company’s business
could be adversely affected.
interruption
If
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
markets
facilities,
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
downturn could adversely affect
the Company’s
impair the ability to raise
results of operations,
the
or
capital,
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
•
•
•
•
•
•
•
in stock market prices and
variations in the Company’s quarterly results
of operations;
changes in market valuations of companies in
the Company’s industry;
fluctuations
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
announcements by the Company or
the
Company’s competitors of new business,
acquisitions, or joint ventures.
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
16
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,
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 and growth of 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,
level of
financial condition, capital requirements,
indebtedness, statutory and contractual restrictions
applying to the payment of dividends, and other
considerations deemed relevant by the board of
directors. Additionally, should the Company seek
future financing or
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.
refinancing of
Certain anti-takeover provisions of the Company’s
charter documents and applicable Delaware law
could discourage or prevent others from acquiring
the
the Company, which may adversely affect
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,
to fix the
to each series,
with respect
designation, powers, preferences and rights of
the shares of the series;
prohibit stockholders from calling special
meetings;
limit
written consent;
prohibit cumulative voting; and
stockholder
for
notice
require
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
similar
Aforementioned
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,
which would result
in the dilution of current
stockholders ownership interests. The Company is
currently authorized to issue 80,000,000 shares of
common stock. Additional shares are subject
to
issuance through various equity compensation plans
17
or
through the exercise of currently outstanding
options. The potential issuance of additional shares of
common stock 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.
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 attributes to
offset
an
In general,
ownership change occurs if
the aggregate stock
ownership of certain stockholders increases by more
than 50 percentage points over such stockholders’
income.
taxable
future
testing period could result
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 carryforwards for taxable
years including or following an identified “ownership
change.” Transactions
involving the Company’s
common stock, even those outside the Company’s
control, such as purchases or sales by investors,
in an
within the
“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 expire unused, in each instance reducing or
the NOLs and tax
eliminating the benefit of
attributes. Similar rules and limitations may apply for
state income tax purposes.
Disclaimer of Obligation to Update
Except as required by applicable law or regulation,
the Company assumes no obligation (and specifically
disclaims any such obligation) to update these risk
forward-looking statement
factors or any other
to reflect actual
contained in this Annual Report
results, changes in assumptions or other
factors
affecting such forward-looking statements.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Properties.
At December 31, 2014, the Company operated 36
manufacturing and warehouse facilities in 11 U.S.
states. The Company owns 15 of these facilities and
the remainder are leased with lease terms that expire
from 2015 through 2031. In addition, the Company’s
corporate office is a leased facility located in
Houston, Texas. The following table sets forth
facility locations:
18
Segment
Energy Chemical
Technologies
Owned/
Leased
Location
Owned Marlow, Oklahoma
Owned Carthage, Texas
Owned Wheeler, Texas
Leased Raceland, Louisiana
Leased The Woodlands, Texas
Owned Waller, Texas
Owned Healdton, Oklahoma
Leased Plano, Texas
Leased Keller, Texas
Leased Coahoma, Texas
Leased Natoma, Kansas
The Company considers owned and leased facilities
to be in good condition and suitable for the conduct
of business.
Item 3.
Legal Proceedings.
From time to time, the Company may be party 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.
Item 4.
Mine Safety Disclosures.
Drilling
Technologies
Owned Oklahoma City, Oklahoma
Not applicable.
Owned Houston, Texas
Owned Midland, Texas
Owned Robstown, Texas
Owned Vernal, Utah
Owned Evanston, Wyoming
Leased Bossier City, Louisiana
Leased New Iberia, Louisiana
Leased Pocola, Oklahoma
Leased Grand Prairie, Texas
Leased Houston, Texas
Leased Midland, Texas
Leased Odessa, Texas
Leased Pittsburgh, Pennsylvania
Leased Wysox, Pennsylvania
Leased Woodward, Oklahoma
Leased Casper, Wyoming
Leased Bryan, Texas
Production
Technologies
Owned Gillette, Wyoming
Owned Dickinson, North Dakota
Owned Vernal, Utah
Leased Farmington, New Mexico
Leased Gillette, Wyoming
Leased Denver, Colorado
Consumer and
Industrial
Chemical
Technologies
Owned Winter Haven, Florida
19
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 16, 2015, there were 53,364,905 shares of
common stock outstanding held by approximately
14,750 holders of record. The Company’s closing
sale price of the common stock on the NYSE on
January 16, 2015 was $16.31. 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 its 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.
2014
2013
Fiscal quarter ended:
March 31,
June 30,
September 30,
December 31,
High
$28.19
$32.66
$32.22
$25.23
Low
$18.67
$26.98
$25.65
$16.11
High
$16.35
$18.00
$23.08
$23.46
Low
$12.54
$14.57
$17.85
$19.01
20
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
beginning December 31, 2009 through December 31,
2014. The performance graph assumes $100 invested
on December 31, 2009 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 following 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 amended, except
to the extent the Company specifically incorporates
the graph by reference.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
on December 31, 2009
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2009
Flotek Industries, Inc.
2010
2011
Russell 2000 Index
2012
2014
Philadelphia Oil Service Index (OSX)
2013
Flotek Industries, Inc.
Russell 2000 Index
Philadelphia Oil Service Index (OSX)
2009
$100
$100
$100
2010
$407
$125
$126
December 31,
2012
2011
$743
$118
$111
$910
$136
$113
2013
2014
$1,498
$1,389
$186
$144
$193
$108
21
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
2,723,732
$11.98
2,269,585
—
2,723,732
—
$11.98
—
2,269,585
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, 2014, the Company has repurchased $10.4 million of its common stock under this
repurchase program and $14.6 million may yet be used to purchase shares.
Total Number
of Shares
Purchased (1)
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, 2014
10,482
$21.07
November 1 to
November 30, 2014
1,090
$21.90
December 1 to
December 31, 2014
Total
(1)
621,374
632,946
$16.74
$16.82
—
—
621,176
621,176
$25,000,000
$25,000,000
$14,604,569
$14,604,569
The Company purchased shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations
related to period vesting of restricted shares and exercise of non-qualified stock options, (b) to satisfy payments required for common
stock upon the exercise of stock options, and (c) as part of a publicly announced repurchase program.
22
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” in this Annual
Report. The selected operating and financial position
data as of and for each of the five years presented
have been derived from audited consolidated
Company financial statements, some of which appear
elsewhere in this Annual Report.
the Company made
During 2014,
two small
acquisitions and incurred insignificant non-recurring
charges. The net income and non-recurring charges
related to these acquisitions do not materially affect
comparability. During 2013, the Company acquired
Florida Chemical Company,
consideration of $106.4 million.
Inc.
for purchase
During 2012, the Company recorded a reduction in
the valuation allowance for deferred tax assets of
$16.5 million. The Company incurred significant
non-recurring charges during 2010 through 2012.
During 2012, 2011 and 2010, the Company incurred
losses on the extinguishment of debt of $7.3 million,
$3.2 million and $1.0 million, respectively. During
2010, the Company recorded fixed asset and other
intangible impairment charges of $9.3 million.
Additionally, during 2012, 2011 and 2010,
the
Company recorded a change in the fair value of
warrant liability of $2.6 million income, $9.6 million
income, and $21.5 million expense, respectively.
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 (deficit)
2014
As of and for the year ended December 31,
2011
2012
(in thousands, except per share data)
2013
2010
$ 449,157
80,888
53,603
0.98
0.97
$
$
$ 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)
$
$
$ 423,276
$ 375,581
$ 219,867
$ 232,012
$ 184,807
25,398
306,003
35,690
249,752
22,455
154,730
100,613
78,298
126,682
(3,453)
23
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
The following discussion and analysis should be read
in conjunction with the Consolidated Financial
Statements and the related Notes to the Consolidated
Financial Statements included elsewhere in this
Annual Report. The following information contains
to
forward-looking statements, which are subject
risks and uncertainties. Should one or more of these
risks or uncertainties materialize, actual results could
differ
implied by the
forward-looking statements. See “Forward-Looking
Statements” at the beginning of this Annual Report.
from those expressed or
Executive Summary
Flotek is a global 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
consumer and industrial markets.
The Company’s oilfield businesses include specialty
chemicals and logistics, down-hole drilling tools and
production-related tools. Flotek’s technologies enable
customers to drill wells more efficiently, increase
well production and decrease well operating costs.
The Company also provides automated bulk material
handling, loading facilities and blending capabilities.
The Company sources citrus oil domestically and
internationally and is one of the largest processors of
in the world. Products produced from
citrus oil
processed
value
citrus
compounds used as additives by companies in the
and
fragrances
flavors
(2) environmentally friendly chemicals for use in
numerous industries around the world, specifically
the O&G industry.
markets
include
high
and
(1)
oil
Flotek operates in over 20 domestic and international
markets, including the Gulf Coast, Southwest, Rocky
Mountains, Northeastern
and Mid-Continental
regions of
the U.S., Canada, Mexico, Central
America, South America, Europe, Africa, Middle
East, Australia and Asia-Pacific. Customers include
major integrated O&G companies, oilfield services
companies, independent O&G companies, pressure-
pumping service companies, national and state-
owned oil companies, and international supply chain
management companies. The Company also serves
customers who purchase non-energy-related citrus oil
and related products,
including household and
commercial cleaning product companies, fragrance
and cosmetic companies, and food manufacturing
companies.
reportable
The operations of the Company are categorized into
Energy Chemical
segments:
four
Technologies, Consumer and Industrial Chemical
Technologies, Drilling Technologies and Production
Technologies (previously referred to as Artificial Lift
Technologies).
Chemical
Technologies
completion,
In
Energy
designs,
develops, manufactures, packages and markets
specialty chemicals used in O&G well drilling,
and
stimulation
cementing,
production.
the Company’s
addition,
chemistries are used in specialized enhanced and
improved oil
(“EOR” or
recovery markets
“IOR”). Activities in this segment also include
construction and management of automated
material handling facilities and management of
loading facilities and blending operations for
oilfield services companies.
Consumer and Industrial Chemical Technologies
designs, develops and manufactures products
that are sold to companies in the flavor and
fragrance industries and specialty chemical
are used by
technologies
industry. These
beverage
fragrance
food
companies, and companies providing household
and industrial cleaning products.
Drilling Technologies
inspects,
manufactures and markets down-hole drilling
equipment used in energy, mining, water well
and industrial drilling activities.
Production Technologies assembles and markets
including the
production-related equipment,
Petrovalve™ product
pump
components, electric submersible pumps, gas
separators, valves and services that support
natural gas and oil production activities.
companies,
rents,
sells,
line
and
rod
of
‰
‰
‰
‰
24
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:
demand
Customers’
technology
for
products and services provided by the Company are
dependent on their recognition of the value of:
advanced
‰
‰
‰
drilling
improve
products
Drilling
that
operations and efficiencies,
viable,
Chemistries
socially responsible and ecologically sound, and
Production technologies that improve production
and production efficiencies in maturing wells.
economically
that
are
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,
‰
Health and condition of citrus trees (e.g., disease
and pests), and
International competition and pricing pressures
resulting from natural and artificial pricing
influences.
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.
‰
Chemistries that improve the economics of their
O&G operations,
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 Rig
2014
2013
2012
2014 vs. 2013
% Change
2013 vs. 2012
% Change
1,862
379
2,241
376
1,275
211
1,862
1,745
496
2,241
5.20
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
5.7 %
7.4 %
6.0 %
(13.6)%
15.7 %
(5.8)%
5.7 %
8.7 %
(2.4)%
6.0 %
(0.6)%
(8.2)%
(3.0)%
(7.4)%
(21.2)%
(4.3)%
3.7 %
(8.2)%
(0.9)%
(23.3)%
(7.4)%
6.3 %
Source: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); Rig counts are the annual average of the reported weekly rig count activity.
Well count: Baker Hughes, Inc. (www.bakerhughes.com); Well counts are the annual average of the reported quarterly wells/rig activity.
25
During year ended 2014,
total North American
active drilling rig count saw an increase when
compared to the comparable periods of 2013 but a
decrease compared to 2012. The increase in 2014
was primarily in horizontal
rig types and rigs
drilling in oil fields. While the U.S. drilling activity
decreased by (8.2)% from 2012 to 2013,
it
increased by 5.7% in 2014 compared to 2013.
However, the number of wells drilled per rig per
quarter in 2014 has decreased to 5.20 from 5.23 for
the same period in 2013.
Outlook for 2015
to
drilling
from chemistry
its broad range of
During the second half of 2014 the price of crude oil
declined dramatically with the decline continuing in
early 2015. As a result, most North American
exploration and production companies—many of
which are Flotek clients—have announced plans to
significantly reduce their exploration and drilling
activity in 2015. The Company expects the reduction
in activity to create a more challenging environment in
energy
which to market
technologies,
and
production technologies. Although the Company
expects demand for its oil and gas related products and
services in North America to be impacted by these
industry conditions, the Company plans to continue
aggressive marketing of its oil and gas based products
and services including its Complex nano-Fluid®
chemistries, Teledrift®
recently
introduced Stemulator® product line and growing line
of production technologies. While
international
markets may react differently than North American
markets to the decline in crude prices, the Company
expects similar market challenges around the globe.
However, the Company believes there are a number of
new market opportunities that remain available in the
current price environment.
product
line,
The Company expects capital spending to be
approximately $25 million in 2015, inclusive of
approximately $10 million for construction of major
facilities,
including the Company’s previously
announced Global Research & Innovation
headquarters
in Houston and the Company’s
chemistry manufacturing and research facility near
Sohar, Oman, through its joint venture with Gulf
Energy. The Company believes construction of
these facilities should generate substantial value in
2016 and beyond. The Company will remain nimble
in its core capital expenditure plans, adjusting as
market conditions warrant.
26
The Company’s new Global Research & Innovation
headquarters in Houston will not only allow for the
development of new energy chemistries but will
allow expanded collaboration between clients,
leaders from academia and Company scientists. The
company believes these collaborative opportunities
will become an important and distinguishing
capability within the industry. The Company also
plans to continue to expand the capabilities and use
of its patent pending FracMaxTM software which
should continue to enhance the Company’s sales
and marketing efforts by validating the production
the Company’s core
and economic benefits of
Complex nano-Fluid® chemistries.
The Company continues to pursue selected strategic
relationships, both domestically and internationally,
to expand its business.
In January, 2014, the Company 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 have been combined with the
Company’s previously existing EOR products and
services.
in
SiteLark,
interests
SiteLark
In April, 2014, the Company acquired 100% of the
LLC
membership
(“SiteLark”).
reservoir
engineering and modeling services for a variety of
assists
Its
hydrocarbon
applications.
reservoir
simulation,
engineers with reservoir
engineering and waterflood optimization.
provides
service
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
are sufficient
the Company’s needs to
supply its flavor and fragrance business as well as
the industrial markets. However, market price
volatility may result
in revenue and margin
fluctuations from quarter to quarter.
to meet
Changes to global geo-political, global economic
and industry events could have an impact, either
positive or negative, on the Company’s business. In
the event of significant adverse changes to the
the
demand for oil and gas production and/or
market price for oil and gas, 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 while continuing to make strategic capital
investments and acquisitions if and when opportunities
arise. In addition, management believes the Company
is well-positioned to take advantage of significant
increases in demand for its products should market
conditions improve dramatically in the near term.
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 innovation 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
$
2014
449,157
266,198
182,959
Year ended December 31,
2013
371,065
223,538
147,527
$
$
40.7 %
87,146
19.4 %
9,738
4,976
211
80,888
18.0 %
—
(2,004)
78,884
(25,281)
53,603
$
39.8 %
78,197
21.1 %
7,273
3,752
(421)
58,726
15.8 %
—
(1,776)
56,950
(20,772)
36,178
$
$
2012
312,828
181,209
131,619
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
Net income %
11.9 %
9.7 %
15.9 %
Results for 2014 compared to 2013—Consolidated
Consolidated revenue for the year ended December 31,
2014 increased $78.1 million or 21.0%, from the prior
corresponding period. The increase in revenue was
primarily due to increased sales of
stimulation
our Energy Chemical
chemical
Technologies segment and the incremental revenue
from the acquisition of Florida Chemical in the second
quarter of 2013 and the 2014 acquisition of EOGA.
additives
in
Consolidated gross margin for
the year ended
December 31, 2014 increased $35.4 million, or
24.0%, from the prior corresponding period. Gross
margin as a percentage of revenue increased to
40.7% for the year ended December 31, 2014 from
39.8% from the prior corresponding period, primarily
attributable to improved margins in the drilling
technologies segment.
and
general
administrative
Selling,
(“SG&A”)
expenses are not directly attributable to products sold
or services provided. SG&A costs as a percentage of
revenue declined from 21.1% to 19.4% for the year
ended December 31, 2014 compared to the prior
corresponding period as revenues grew faster than
SG&A costs. SG&A costs increased $8.9 million, or
11.4%, for the year ended December 31, 2014 from
the prior corresponding period primarily due to
SG&A costs for the acquired companies discussed
above and increased headcount and associated costs
related to the pursuit of growth opportunities.
Depreciation and amortization expense not included in
gross margin, for the year ended December 31, 2014
increased by $2.5 million, or 33.9% from the prior
corresponding period. This increase was primarily
attributable to the depreciation and amortization of
assets recognized as part of the acquisition of Florida
Chemical
in the second quarter of 2013 and the
acquisition of EOGA in the first quarter of 2014.
27
Research and Innovation (“R&I”) expense for the
year ended December 31, 2014 increased $1.2
million or 32.6% for the year ended December 31,
2014 from the prior corresponding period. The
increase in R&I is primarily attributable to new
product
to
remaining responsive to customer needs, increased
demand and continued growth of our existing
product lines.
innovation and Flotek’s commitment
Interest and other expense increased $0.2 million,
or 12.8% for the year ended December 31, 2014
compared to the prior corresponding period.
The Company recorded an income tax provision of
$25.3 million, yielding an effective tax rate of
32.0% for the year ended December 31, 2014
compared to an income tax provision of $20.8
million yielding an effective tax rate of 36.5% in
the prior corresponding period. The change in the
effective tax rate from 2013 to 2014 was primarily
due to changes in state apportionment
factors
including the effect on state deferred tax assets and
liabilities.
Results for 2013 compared to 2012—Consolidated
for
the
year
revenue
Consolidated
ended
December 31, 2013 increased $58.2 million, or
18.6%, from the prior corresponding period. The
increase in revenue was primarily due to the
acquisition of Florida Chemical, which contributed
incremental revenue of $50.9 million during 2013.
the acquisition, 2013
Excluding the impact of
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
the Energy Chemical
Technologies
Technologies
segments were partially offset by revenue declines
in the Drilling Technologies segment.
increases
and
Production
in
the year ended
Consolidated gross margin for
December 31, 2013 increased $15.9 million, or
12.1%, from the prior corresponding period. 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.
28
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.
Selling, general and administrative (“SG&A”)
expenses are not directly attributable to products
sold or services provided. SG&A costs for the year
ended December 31, 2013 increased by $11.8
million, or 17.7% from the prior corresponding
period. 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 costs incurred in 2013
related to executive severance ($1.0 million),
implementation of the Company’s new ERP system
($0.8 million), and expenses related to the pursuit of
acquisitions and major initiatives in international
markets ($1.7 million). Excluding these items and
the
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 21.1% for the year ended
December 31, 2013 compared to the prior
corresponding period.
incremental SG&A costs of
Depreciation and amortization expense not included
in gross margin, for the year ended December 31,
2013 increased by $2.9 million or 64.9% from the
prior corresponding period. This increase was
primarily attributable to incremental depreciation
and amortization of assets recognized as part of the
acquisition of Florida Chemical.
R&I expense for the year ended December 31, 2013
increased $0.6 million or 17.9% from the prior
corresponding period. The increase in R&I
is
primarily attributable to new product innovation,
and Flotek’s commitment to remaining responsive
to increased demand and continued growth of our
product lines.
Interest and other expense for
the year ended
December 31, 2013 decreased by $14.0 million, or
88.8% from the prior corresponding period. The
decline in interest expense was primarily due to the
repayment of the Company’s convertible notes of
$50.3 million at the end of the fourth quarter of
2012 and $5.2 million during the first quarter of
2013.
The Company recorded an income tax provision of
$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
prior
corresponding period. The Company’s effective tax
(9.5)% for
rate
tax
the
of
rate in 2012 was affected primarily by an $18.6
million decrease in the valuation allowance against a
deferred tax asset. Additionally,
in
effective tax rates have historically been impacted by
non-cash changes in the fair value of the Company’s
warrant liability and permanent tax differences.
fluctuations
Results by Segment
Energy Chemical Technologies (dollars in thousands)
Year ended December 31,
2013
2014
Revenue
Gross margin
Gross margin %
Income from operations
Income from operations %
$
$
$
268,761
117,867
43.9 %
84,846
31.6 %
$
$
$
200,932
88,536
44.1 %
65,396
$
$
$
32.5 %
35.6 %
2012
183,986
81,438
44.3 %
65,440
Results for 2014 compared to 2013—Energy
Chemical Technologies
prior
from the
corresponding
Energy Chemical Technologies revenue for the year
ended December 31, 2014 increased $67.8 million, or
period.
33.8%,
Excluding the incremental revenue impact of the
Florida Chemical, EOGA and SiteLark acquisitions
of $10.5 million, revenue increased $57.3 million, or
28.5%, compared with the prior corresponding
period, primarily due to the increased sales of
stimulation chemical additives, largely the result of
the Company’s proprietary,
the introduction of
which
patent-pending
statistically demonstrates the positive production and
economic impact of using Flotek’s CnF® chemistries
in unconventional well completions. The FracMaxTM
led to a record number of new
software has
validation projects
and accelerated commercial
the Company’s CnF® completion
acceptance of
chemistries.
FracMax™ software
Energy Chemical Technologies gross margin for the
year ended December 31, 2014 increased $29.3
million, or 33.1%, from the prior corresponding
period primarily due to the increase in product sales
revenue. Gross margin as a percentage of revenue for
the year ended December 31, 2014 was essentially
unchanged
prior
43.9% compared
corresponding period.
the
to
at
Income from operations for the Energy Chemical
increased $19.5 million, or
Technologies segment
29
29.7% for year ended December 31, 2014 compared
to the prior corresponding period. This increase is
primarily attributable to an increase in gross margin,
partially offset by increased sales and marketing
efforts in pursuit of growth opportunities and the
to its research
Company’s continued commitment
and innovation efforts within Energy Chemical
Technologies.
Results for 2013 compared to 2012—Energy
Chemical Technologies
prior
from the
corresponding
Energy Chemical Technologies revenue for year
ended December 31, 2013 increased $16.9 million, or
9.2%,
period.
Excluding the incremental revenue impact of the
Florida Chemical acquisition of $8.0 million, revenue
increased $8.9 million, or 4.9% from the prior
corresponding period. 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%. Throughout the
stimulation
year, customers
chemicals in the Rockies, South Texas and other
North American basins.
increased usage of
Energy Chemical Technologies’ gross margin for the
year ended December 31, 2013 increased $7.1
million, or 8.7% from the prior corresponding period.
Gross margin percentage for 2013 declined 0.2%
compared to the prior corresponding period primarily
attributable to product portfolio mix resulting from
sales of non-proprietary
proportionately higher
from operations percentage for 2013 decreased 3.1%
compared to the 2012. The decrease in income from
operations
to
is
increased R&I, sales staff and travel costs incurred in
pursuit of growth opportunities.
percentage
primarily
related
Year ended December 31,
$
$
$
2014
51,091
12,897
25.2 %
6,558
12.8 %
$
$
$
2013
42,927
10,659
24.8 %
6,260
14.6 %
2012
$ —
$ —
— %
$ —
— %
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.
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
general direction of
the citrus oil markets and
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
from
income
Company’s
operations over the comparable period of 2012.
consolidated
overall
products partially offset by the supply chain benefits
of the Florida Chemical acquisition.
Income from operations for the Energy Chemical
Technologies segment was relatively flat for the year
ended December 31, 2013 compared to 2012. Income
Consumer and Industrial Chemical Technologies
(dollars in thousands)
Revenue
Gross margin
Gross margin %
Income from operations
Income from operations %
Results for 2014 compared to 2013—Consumer and
Industrial Chemical Technologies
CICT revenue for the year ended December 31, 2014
increased $8.2 million or 19.0%, from the prior
corresponding period, as the segment was created in
the second quarter of 2013 upon the acquisition of
Florida Chemical.
CICT gross margin for the year ended December 31,
2014 increased $2.2 million, or 21.0% from the prior
corresponding period primarily due to the segment
being created in the second quarter of 2013 upon the
acquisition of Florida Chemical. Gross margin as a
percentage of revenue increased to 25.2% for the
year ended December 31, 2014 compared to 24.8%
from the prior corresponding period.
Income from operations for
the CICT segment
increased $0.3 million, or 4.8%, for the year ended
December 31, 2014 from the prior corresponding
period primarily due to the increased revenue
between the two periods.
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
30
Drilling Technologies (dollars in thousands)
Revenue
Gross margin
Gross margin %
Income from operations
Income from operations %
$
$
$
Results for 2014 compared to 2013—Drilling
Technologies
Drilling Technologies revenue for the year ended
December 31, 2014 increased $0.9 million, or 0.8%
from the prior corresponding period primarily due to
an increase in actuated tool rentals.
‰
‰
‰
Rental revenue for the year ended December 31,
2014 increased by $3.7 million, or 6.0% from the
prior corresponding period. Leading the increase
was motor rentals which rose 52.9% along with
growth of 96.5% in Stemulator® tool activity.
This was partially offset by a decrease of 32.0%
in other tool rental types and flat activity for
Teledrift® year over year.
sales
revenue for
Product
the year ended
December 31, 2014 decreased by $2.5 million, or
6.8%,
from the prior corresponding period,
primarily due to decreased domestic float and
motor product sales revenue and decreased
international drill pipe sales.
Service revenue for the year ended December 31,
2014 decreased $0.3 million, or 2.0%, from the
prior corresponding period primarily related to
decreased rig service jobs and inspections.
Drilling Technologies gross margin for the year ended
December 31, 2014 increased $2.5 million, or 5.8%,
from the prior corresponding period and increased to
40.3% as a percentage of revenue compared to 38.4%
from year end 2013. This was primarily due to
increased material margins on the actuated tool rentals
as a direct result of repair cost decreases and direct
expense controls put in place during 2014.
Drilling Technologies income from operations for the
year ended December 31, 2014 increased by $0.7
million or 3.9% from the prior corresponding period.
Income from operations as a percentage of revenue
31
Year ended December 31,
2013
$
$
$
112,406
43,156
38.4 %
18,306
16.3 %
$
$
$
2014
113,302
45,651
40.3 %
19,022
16.8 %
2012
116,736
45,709
39.2 %
22,282
19.1 %
increased to 16.8% for the year ended December 31,
2014 from 16.3% in the prior corresponding period.
These increases were also due to increased material
margins and direct expense controls mentioned
above.
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%
from the prior
corresponding period. Revenue
declines can be primarily attributed to a decline in
actuated tool rentals. A 21% decline in vertical wells
limited the
in 2013 compared to 2012 has
opportunities for renting tools directly to operators.
‰
‰
Product
Product Revenue:
revenue was
relatively flat for the year ended December 31,
2013 compared to the prior corresponding
period, 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
42.0% 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 31.0% in South America, the Middle
East, Canada and Kazakhstan mitigated the loss
of
revenue in the US. Also offsetting the
actuated tool decline was revenue growth for the
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 ended December 31, 2013 increased $1.1
million, or 8.7% from the prior corresponding
period. The increased service revenue was
primarily related to increased rig installations,
inspections and increased pricing of services
offered in the market.
Drilling Technologies gross margin for the year
ended December 31, 2013 decreased by $2.6 million,
or 5.6%, from the prior corresponding period 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 from the prior corresponding period. This
decline was primarily due to the lower revenue and
gross margins, increased sales force related costs,
medical costs, and general insurance expenses.
Production Technologies (dollars in thousands)
Revenue
Gross margin
Gross margin %
Income from operations
Income from operations %
Year ended December 31,
2013
2012
2014
$
$
$
16,003
6,544
40.9 %
3,246
20.3 %
$
$
$
14,800
5,176
35.0 %
3,060
20.7 %
$
$
$
12,106
4,472
36.9 %
3,395
28.0 %
Results for 2014 compared to 2013—Production
Technologies
Results for 2013 compared to 2012—Production
Technologies
Revenue for the Production Technologies segment for
the year ended December 31, 2014 revenue increased
by $1.2 million, or 8.1% from the prior corresponding
period as sales of PetrovalveTM tools and lifting units
rose by $4.6 million, or 152.9% in 2014. Offsetting
those revenue increases was a decrease in equipment
sales and related services of $3.5 million, or 31.1% in
coal-bed methane related business.
the year
Production Technologies gross margin increased by
ended
$1.4 million, or 26.4% for
December 31, 2104. Gross margin as a percentage of
revenue increased to 40.9% compared to 35.0%, from
the prior corresponding period, primarily due to the
higher margins associated with the international
valve sales and slight improvement in margins on
pump equipment.
Income from operations increased by $0.2 million, or
6.1% for the year ended December 31, 2014, from
the prior corresponding period, primarily due to the
increased material margins mentioned above partially
offset by SG&A expenses which increased by 55.6%
employee-related
due
expenses as the segment continues to refocus and
reposition for growth in the market.
attributable
costs
to
to
is
revenue
related equipment
Production Technologies
primarily
derived from coal bed methane (“CBM”) drilling
activity, and is impacted by the price of natural gas;
is starting to diversify into
although the segment
more oil
sales and service.
Revenue for the Production Technologies segment
for the year ended December 31, 2013 increased by
$2.7 million, or 22.3% from the prior corresponding
period. 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 increase is due to a slight rebound in the gas
workover drilling market, additional installations in
2013, and more oil related equipment sales.
Production Technologies gross margins increased for
the year ended December 31, 2013 by $0.7 million or
15.7% from the prior corresponding period due to the
increased sales. As a percentage of revenue, gross
margin has declined by 1.9% from the prior
corresponding period 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.
32
Income from operations decreased $0.3 million or
9.9%, for the year ended December 31, 2013 from
the prior corresponding period. 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.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements arise
from the Company’s needs to service debt, acquire
fund working capital
and maintain equipment,
requirements and when the opportunities arise,
to
make strategic acquisitions. The Company funds its
operating and capital requirements through operating
cash flows and debt financing.
The Company’s primary source of debt financing is
its Credit Facility with PNC Bank. This Credit
Facility contains provisions for a revolving credit
facility of up to $75 million and a term loan secured
by substantially all of the Company’s domestic real
and personal property, including accounts receivable,
land, buildings, equipment and other
inventory,
intangible assets. As of December 31, 2014,
the
Company had $8.5 million in outstanding borrowings
under the revolving credit facility and $35.5 million
outstanding under the term loan. At December 31,
2014, the Company was in compliance with all debt
covenants. Significant terms of the Company’s credit
facility are discussed in Part II, Item 8—“Financial
Statements and Supplementary Data” in Note 10 of
“Notes to Consolidated Financial Statements” herein.
At December 31, 2014,
the Company remained
compliant with the continued listing standards of the
NYSE.
Cash and cash equivalents totaled $1.3 million at
the Company
December 31, 2014. During 2014,
generated $48.8 million of cash inflows
from
operations (net of $28.9 million expended in working
capital), received gross proceeds of $357.2 million
from the issuance of new debt and received $4.6
million in proceeds related to lost-in-hole and asset
sales activity. Offsetting these cash inflows,
the
Company paid $5.7 million associated with the
purchases of EOGA and SiteLark, paid down $375.2
million of debt, used $19.9 million in capital
expenditures
and $10.4 million to repurchase
common stock.
Liquidity
The Company plans to spend approximately $25 million
for committed and planned capital expenditures,
inclusive of approximately $10 million for major
facilities in R & I and Oman that will be initiated in
2015. 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 required under the credit
facility agreement. If necessary,
the Company will
utilize its available capacity under the revolving credit
agreement to fulfill its liquidity needs. Any excess cash
generated may be used to pay down the level of debt,
repurchase company stock or be retained for future use.
The Company may pursue acquisitions when strategic
opportunities arise and may access external financing to
fund those acquisitions, if needed.
Cash Flows
Cash flow metrics from the consolidated statements of cash flows are as follows (in thousands):
Year ended December 31,
2013
2012
2014
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
$ 48,822
(21,703)
(28,440)
(143)
$ 39,548
(62,700)
23,501
(319)
$ 49,515
(15,200)
(78,301)
4
$ (1,464)
$
30
$(43,982)
33
Operating Activities
During 2014, 2013 and 2012, cash from operating
activities totaled $48.8 million, $39.5 million and
net
$49.5 million,
earnings for 2014 totaled $53.6 million, compared
to consolidated net earnings of $36.2 million for
2013 and consolidated net earnings of $49.8 million
for 2012.
respectively. Consolidated
expense
($17.8 million),
Noncash items recognized in 2014 totaled $24.2
million, consisting primarily of depreciation and
stock
amortization
compensation expense ($10.5 million), changes to
deferred income taxes ($1.5 million) and provisions
related to accounts receivables and inventories
($0.8 million) partially offset by gain on sale of
assets ($3.4 million) and excess tax benefit related
to share-based awards ($3.4 million).
expense
($15.1 million),
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 gains on the sale of
assets ($4.6 million) and excess tax benefit related
to share-based awards ($1.7 million).
Noncash items recognized in 2012 totaled $10.4
million, consisting primarily of depreciation and
amortization expense ($11.6 million), amortization of
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).
primarily
consisting
During 2014 changes in working capital used $28.9
increased
of
million,
inventories
receivables
($23.1 million), higher
($13.7 million), increased other current assets ($6.4
million), partially offset by higher payables ($13.1
million) and higher income taxes payables ($1.4
million).
During 2013 changes in working capital used $19.3
million in cash, 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).
34
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
million) accrued liabilities
($1.9 million) and
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).
Investing Activities
including
$19.9 million
During 2014 investing activities used cash of $21.7
million,
capital
expenditures and $5.7 million associated with the
purchase of Eclipse IOR Services, LLC and
SiteLark, LLC, partially offset by proceeds from
sales of assets ($4.6 million).
in
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
from sales of
($5.8 million). Capital
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, investing activities used cash of $15.2
million. Capital expenditures were $20.7 million
and were partially offset with proceeds from the
sale of assets of $5.5 million.
Financing Activities
During 2014, financing activities used cash of $28.4
million primarily related to the net repayment of the
revolving line of credit ($7.8 million), payments on
the term loan ($10.3 million) and net equity related
transactions
the
repurchase of common stock.
($10.0 million)
primarily
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
Financing activities used $78.3 million in cash during
2012 for the payments on capital lease obligations
and the retirement of convertible notes ($102.4
million) and the 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).
Although the Company has no immediate intention to
access the capital markets, the Company intends to
file a “universal” shelf registration with the Securities
and Exchange Commission in the future. 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,
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
2014,
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
financial
effect on the Company’s
condition, change in financial condition, revenue,
liquidity, capital
expenses,
expenditures or capital resources that are material to
investors.
results of operations,
future
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
and services. Correspondingly,
impact of
contractual obligations on the Company’s liquidity
and capital resources in future periods is analyzed in
conjunction with such factors.
the
Material contractual obligations consist of repayment
of amounts borrowed under the Company’s Credit
Facility and payment of operating lease obligations.
Contractual obligations at December 31, 2014 are as follows (in thousands):
Term loan
Estimated interest expense on term loan (1)
Borrowings under revolving credit facility (2)
Operating lease obligations
Total
Payments Due by Period
Total
$ 35,541
3,262
8,500
25,208
$ 72,511
Less than
1 year
$ 10,143
1,369
8,500
2,440
$ 22,452
1 - 3 years
3 -5 years
$ 14,286
1,696
-
4,921
$ 20,903
$ 11,112
197
-
3,929
$ 15,238
More than
5 years
$
-
-
-
13,918
$ 13,918
(1)
(2)
For the purpose of this calculation, interest rates on variable rate obligations remain unchanged from December 31, 2014.
The borrowing is classified as current debt. The weighted-average interest rate was 3.75% at December 31, 2014.
Critical Accounting Policies and Estimates
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 reporting period. Significant
accounting policies
are described in Note 2
“Summary of Significant Accounting Policies” in the
Notes to the Consolidated Financial Statements. The
Company believes the following accounting policies
are critical due to the significant, subjective and
complex judgments and estimates required when
35
preparing the consolidated financial statements. The
Company regularly reviews judgments, assumptions
and estimates to the critical accounting policies.
Revenue Recognition
of
(a)
sales
evidence
for product
and services
Revenue
is
recognized when all of the following criteria have
an
persuasive
been met:
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 the customer is fixed and
determinable, and (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.
Chemical
recorded at
Technologies,
Revenue and associated accounts receivable in the
technologies, Consumer and
Energy Chemicals
Industrial
Drilling
Technologies and Production Technologies segments
agreed price when the
are
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
The Logistics division of chemicals recognizes
revenue related to design and construction oversight
contracts using the 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, as well as
and
indirect
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 revisions to revenue and
expenses and are recognized in the period in which
or
such
anticipated losses on contracts are recognized when
such amounts become probable and estimable.
probable. Known
to manufacturing
revisions
become
related
costs
36
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 Production
Technologies segment is recorded net of any credit
issued for return of an item for refurbishment under
the equipment exchange program.
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
expectations as available. Determination of
the
collectability of amounts due from customers
requires the Company to use estimates and make
judgments
regarding future events and trends,
including monitoring customers’ payment history
and current credit worthiness in order to determine
reasonably assured. The
collectability is
that
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
operating
industry may
performance and cash flows, which could impact
these
the Company’s
ability
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, 2014, the allowance was 1.1% of
gross
an
allowance of 1.3% a 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
Inventories consist of
raw materials, work-in-
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 or
impairments for excess or obsolete inventory based
on the Company’s forecast of product demand,
inventory on hand, market
historical usage of
procurement
conditions,
requirements
developments.
Significant or unanticipated changes in market
conditions or Company forecasts could affect the
amount and timing of provisions for excess and
obsolete inventory and inventory impairments.
and
technological
production
and
Significant changes have not been made in the
methodology used to estimate the reserve for excess
and obsolete inventory or impairments during the
past three years. Specific assumptions are updated
at the date of each evaluation to consider Company
experience and current industry trends. Significant
judgment is required to predict the potential impact
which the current business climate and evolving
market conditions could have on 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
in adjustments to management
conditions result
assumptions, impairment losses could be realized in
future periods.
37
At December 31, 2014,
the Company recorded
impairments for all inventory items recognized in
the allowance for excess and obsolete inventory.
Business Combinations
The Company allocates the fair value of purchase
consideration to the assets acquired,
liabilities
assumed, and any non-controlling interests in the
acquired entity generally based on their fair values
at the acquisition date. The excess of the fair value
of purchase consideration over the fair value of
these assets acquired, liabilities assumed and any
non-controlling interests in the acquired entity is
recorded as goodwill. The primary items that
generate goodwill include the value of the synergies
between the acquired company and Flotek and the
acquired assembled workforce.
value of
Acquisition-related
recognized
expenses
separately from the business acquisition and are
recognized as expenses as incurred.
the
are
The purchase price allocation process requires the
management
to make significant estimates and
assumptions at the acquisition date with the respect
to the fair value of:
‰
‰
‰
‰
intangible assets acquired from the acquiree;
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
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
that would indicate
a
at
unit
reporting
impairment
level. At
December 31, 2014, only three reporting units,
Energy Chemical Technologies, Consumer and
Industrial Chemical Technologies and Drilling
Technologies, have a goodwill balance.
During annual goodwill impairment testing in 2014,
2013 and 2012,
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 2014, 2013 or 2012, 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
goodwill. To determine fair value estimates,
the
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
the reporting unit goodwill with the
value of
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.
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
to
make
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 Company’s
apply
factors
assumptions
industry
and
assumptions
in
the
expectations. Key
used
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 occurrence of
The Company cannot predict
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
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 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
the carrying value of
including
capitalized, depreciation and
amounts
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
38
of
an
and
events
property
equipment,
For
or
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
of methodologies,
by
including discounted cash flows.
variety
a
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
change in projected operations or
results of a
reporting unit.
indefinite lived
In 2014, while testing annual
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 2014, 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
identified,
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.
When
a
impairment
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
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 2014, 2013 and 2012.
39
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
considers
principal,
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
Company
or most
the
advantageous market, and assumptions that market
participants would use when pricing the asset or
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
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
various
in which the Company
operates. The Company’s income tax expense will
jurisdictions
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
tax
jurisdictions may impact
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
includes the enactment date. A valuation
that
allowance is used to reduce deferred tax assets
when uncertainty exists regarding their realization.
recorded to reduce
A valuation allowance is
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
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
the Company determines whether a
analysis,
valuation allowance is necessary.
significant
negative
as
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
40
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
consideration
strategies.
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
of
or
The Company’s tax filing group with net operating
loss carryforwards continued to have operating
losses during each quarter of 2010. Beginning with
the first quarter of 2011,
this tax filing group
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
this 12-
calculated average annual
quarter
nonrecurring
adjusted
period,
impairment of fixed assets in 2010, was $3 million.
income was
The
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.
income for
a
for
calculated
average
annual
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
the Company does not operate in a
fact
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
41
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, 2014, 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
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.
including
expected
stock
Loss Contingencies
loss
The Company is subject
the
could
contingencies
Company’s conduct of business. Management
considers the likelihood of a loss or the impairment
to a variety of
during
arise
that
loss
in determining potential
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
the Company are described in Part
Recent accounting pronouncements which may
II,
impact
Item 8. — “Financial
and
Supplementary Data,” Note 2 — Summary of
Significant Accounting Policies
to
Consolidated Financial Statements.
Statements
in Notes
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
these risk
Company does not consider any of
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 under the revolving credit facility. Rates
range (a) between PNC Bank’s base lending rate
plus 0.5% to 1.0% or (b) between the London
Interbank Offered Rate (LIBOR) plus 1.5% to
2.0%. PNC Bank’s base lending rate was 3.25% at
December 31, 2014 and would have permitted
borrowing at rates ranging between 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, 2014, $8.5 million was outstanding
under the revolving credit facility as base rate loans
at an interest rate of 3.75%.
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 Offered Rate (LIBOR) plus
2.25% to 2.75%. At December 31, 2014, $35.5
million was outstanding under the term loan, with
$0.5 million borrowed as base rate loans at an
interest rate of 4.50% and $35.0 million borrowed
as LIBOR loans at an interest rate of 2.41%.
Foreign Currency Exchange Risk
in
demarcated
The Company presently has limited exposure to
foreign currency risk. During 2014, less than 1% of
non-US dollar
revenue was
currencies, and virtually all assets and liabilities of
the Company are denominated in US dollars.
However, as the Company expands its international
operations, non-US denominated activity is likely to
increase. 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
commodity risk inherent
in orange harvests. In
recent years, citrus greening has disrupted citrus
fruit production in Florida and Brazil which caused
to increase. The
raw material
Company believes that adequate global supply is
the Company’s needs and the
available to meet
feedstock cost
42
needs of general chemistry markets at this time. The
Company relies upon diverse, long-term strategic
supply relationships to meet its raw material needs
which are expected to remain in place for the
foreseeable future. Price increases have been passed
along to the Company’s customers. 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
To the Board of Directors and Stockholders
Flotek Industries, Inc.
We have audited Flotek Industries, Inc.’s internal control over financial reporting as of December 31, 2014,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013. Flotek Industries, Inc.’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, 2014, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also 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,
2014 and 2013, and the related consolidated statements of operations, comprehensive income, equity and cash
flows for each of the three years in the period ended December 31, 2014, and our report dated January 27, 2015
expressed an unqualified opinion.
/s/ HEIN & ASSOCIATES LLP
Houston, Texas
January 27, 2015
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Flotek Industries, Inc.
We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc. and subsidiaries as of
December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income,
equity and cash flows for each of the three years in the period ended December 31, 2014. 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, 2014 and 2013, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2014, in
conformity with U.S. generally accepted accounting principles.
We have also 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, 2014, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated January 27,
2015 expressed an unqualified opinion on the effectiveness of Flotek Industries, Inc.’s internal control over
financial reporting.
/s/ HEIN & ASSOCIATES LLP
Houston, Texas
January 27, 2015
45
FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $847 and
$872 at December 31, 2014 and 2013, 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 EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Income taxes payable
Interest payable
Current portion of long-term debt
Total current liabilities
Long-term debt, less current portion
Deferred tax liabilities, net
Total liabilities
Commitments and contingencies
Equity:
December 31,
2014
2013
$
1,266
$
2,730
78,624
85,958
2,696
11,055
179,599
86,111
71,131
12,907
73,528
65,016
63,132
2,522
4,261
137,661
79,114
66,271
15,012
77,523
$
423,276
$
375,581
$
33,185
12,314
1,307
93
18,643
65,542
25,398
25,982
$
19,899
12,778
3,361
111
26,415
62,564
35,690
27,575
116,922
125,829
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; 54,633,726
shares issued and 53,357,811 shares outstanding at December 31, 2014;
58,265,911 shares issued and 51,804,078 shares outstanding at
December 31, 2013
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Treasury stock, at cost; 449,397 and 5,394,178 shares at December 31, 2014
and 2013, respectively
Flotek Industries, Inc. stockholders’ equity
Noncontrolling interests
Total equity
-
-
5
254,233
(502)
52,762
6
266,122
(359)
(841)
(495)
(15,176)
306,003
351
306,354
249,752
-
249,752
TOTAL LIABILITIES AND EQUITY
$
423,276
$
375,581
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
Loss (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
Earnings per common share:
Basic earnings per common share
Diluted earnings per common share
Weighted average common shares:
Year ended December 31,
2013
2012
2014
$
449,157
266,198
182,959
$
371,065
223,538
147,527
$
312,828
181,209
131,619
87,146
9,738
4,976
211
102,071
80,888
-
-
(1,610)
(394)
(2,004)
78,884
(25,281)
53,603
0.98
0.97
$
$
$
78,197
7,273
3,752
(421)
88,801
58,726
-
-
(2,092)
316
(1,776)
56,950
(20,772)
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
1.03
0.97
$
$
$
$
$
$
Weighted average common shares used in computing basic
earnings per common share
54,511
51,346
48,185
Weighted average common shares used in computing diluted
earnings per common share
55,526
53,841
53,554
See accompanying Notes to Consolidated Financial Statements.
47
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year ended December 31,
2013
2012
2014
Net income
Other comprehensive income (loss):
Foreign currency translation adjustment
Comprehensive income
$
53,603
$
36,178
$
49,791
(143)
(319)
4
$
53,460
$
35,859
$
49,795
See accompanying Notes to Consolidated Financial Statements.
48
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
Common
Stock
Treasury Stock
Shares
Issued
Par
Value Shares Cost
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Non-
controlling
Interests
Total
Equity
Balance, December 31, 2011
Net income
Foreign currency translation adjustment
Fair value of warrant liability reclassified to additional
paid-in capital
Stock issued under employee stock purchase plan
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
Return of borrowed shares under share lending
agreement
Balance, December 31, 2012
Net income
Foreign currency translation adjustment
Issuance cost of preferred stock and detachable
51,958 $ 5
-
-
-
-
-
-
348
68
750
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
53,124 $ 5
-
-
-
-
1,358 $ (1,667) $166,814
-
-
-
-
-
-
$ (44)
-
4
$
$(86,810)
49,791
-
-
(15)
-
-
-
30
166
-
-
659
-
-
-
-
-
-
(2,034)
-
-
13,973
161
421
167
-
-
-
528
13,421
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,198 $ (3,701) $195,485
-
-
-
-
-
-
$ (40)
-
(319)
$
$(37,019)
36,178
-
warrants
-
-
Stock issued under employee stock purchase plan
267
Stock warrants exercised
572
Stock options exercised
802
Restricted stock granted
-
Restricted stock forfeited
217
Stock granted in incentive performance plan
-
Treasury stock purchased
-
Excess tax benefit related to share-based awards
-
Stock surrendered for exercise of stock options
Stock compensation expense
-
Stock issued in Florida Chemical Company acquisition 3,284
Return of borrowed shares under share lending
-
-
-
-
-
-
-
-
-
-
-
-
1
-
-
(44)
-
-
-
115
-
448
-
237
-
-
-
-
-
-
-
-
-
(7,568)
-
(3,907)
-
-
(200)
824
323
4,397
-
-
-
-
1,668
-
10,914
52,711
2,440
-
-
agreement
Balance, December 31, 2013
Net income
Foreign currency translation adjustment
Stock issued under employee stock purchase plan
Common stock issued in payment of accrued liability
Stock warrants exercised
Stock options exercised
Restricted stock granted
Restricted stock forfeited
Treasury stock purchased
Stock surrendered for exercise of stock options
Excess tax benefit related to share-based awards
Stock compensation expense
Investment in Flotek Gulf, LLC and Flotek Gulf
Research, LLC
Stock issued in EOGA acquisition
Stock issued in SiteLark acquisition
Repurchase of common stock
Retirement of treasury stock
58,266 $ 6
-
-
-
-
-
-
-
27
-
1,277
-
312
-
526
-
-
-
-
-
-
-
-
-
-
5,394 $(15,176) $266,122
-
-
906
600
1,545
1,660
-
-
-
-
3,448
10,476
-
-
-
-
-
-
-
-
(6,294)
(1,198)
-
-
-
-
(43)
-
-
-
-
61
243
46
-
-
-
94
5
-
(5,873)
-
-
-
-
(1)
-
-
-
-
-
-
621 (10,395)
(5,873) 32,568
-
1,894
149
-
(32,567)
-
-
-
-
-
-
-
-
-
-
-
-
-
$(359)
-
(143)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
(841)
53,603
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
351
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 78,298
49,791
4
13,973
161
421
167
-
-
(2,034)
528
13,421
-
$154,730
36,178
(319)
(200)
824
323
4,397
-
-
-
(7,568)
1,668
(3,907)
10,914
52,712
-
$249,752
53,603
(143)
906
600
1,545
1,660
-
-
(6,294)
(1,198)
3,448
10,476
351
1,894
149
(10,395)
-
Balance, December 31, 2014
54,634 $ 5
449 $
(495) $254,233
$(502)
$ 52,762
$351
$306,354
See accompanying Notes to Consolidated Financial Statements.
49
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2013
2012
2014
Cash flows from operating activities:
Net income
$ 53,603
$ 36,178
$ 49,791
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 provision (benefit)
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 acquisitions, 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
Repurchase of common stock
Proceeds from exercise of stock options
Proceeds from exercise of warrants
Proceeds from noncontrolling interest
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
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
-
17,848
343
-
481
358
(3,407)
10,476
1,502
(3,448)
-
-
(13,749)
(23,096)
(6,388)
13,147
(224)
1,394
(18)
48,822
(19,907)
4,639
(5,704)
(731)
(21,703)
(10,292)
-
357,183
(364,955)
(399)
-
3,448
(6,294)
906
(10,395)
462
1,545
351
(28,440)
(143)
(1,464)
2,730
1,266
$
-
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)
(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
30
2,700
2,730
$
(43,982)
46,682
2,700
$
See accompanying Notes to Consolidated Financial Statements.
50
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”)
is a global, diversified, technology-driven supplier of
energy chemicals and consumer and industrial
chemicals and is a global developer and supplier of
drilling, completion and production technologies and
related services.
to
as
referred
(collectively
includes
Flotek’s strategic focus, and that of its diversified
the
subsidiaries
“Company”),
energy related chemical
technologies, drilling and production technologies,
and consumer and industrial chemical technologies.
Within energy technologies, the Company provides
oilfield specialty chemicals and logistics, down-hole
drilling tools and production related tools used in the
energy and mining industries. Flotek’s products and
to drill wells more
services enable customers
efficiently, to realize increased production from both
new and existing wells and to decrease future well
operating costs. Major customers include leading
oilfield service providers, pressure-pumping service
companies, onshore and offshore drilling contractors,
chemical
technologies,
and major and independent oil and gas exploration
and production companies. Within consumer and
industrial
the Company
the flavor and fragrance
provides products
industry and the industrial chemical industry. Major
customers include food and beverage companies,
fragrance
and companies providing
household and industrial cleaning products.
companies,
for
The Company is headquartered in Houston, Texas,
with operating locations
in Colorado, Florida,
Louisiana, New Mexico, North Dakota, Oklahoma,
Pennsylvania, Texas, Utah, Wyoming, Canada, the
Netherlands and the Middle East. 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
Basis of Presentation
been
The Company’s consolidated financial statements
have
the
in
accounting principles generally accepted in the
United States of America (“GAAP”).
accordance with
prepared
The consolidated financial statements include the
accounts of Flotek Industries, Inc. and all wholly-
owned subsidiary corporations. Where Flotek owns
less than 100% of the share capital of its subsidiaries,
but is still considered to have sufficient ownership to
control
the business
operations are consolidated within the Company’s
financial statements. The ownership interests held by
other parties are shown as noncontrolling interests.
the business,
results of
significant
All
and
intercompany
transactions have been eliminated in consolidation.
The Company does not have investments in any
unconsolidated subsidiaries.
accounts
Cash equivalents consist of highly liquid investments
with maturities of three months or less at the date of
purchase.
Cash Management
a
The Company uses
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
realizable
an
allowance for doubtful accounts to reflect any loss
anticipated on accounts receivable balances. The
Company regularly evaluates its accounts receivable
value. This
incorporates
value
51
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the
to estimate amounts that will not be collected and
records
appropriate provision for doubtful
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,
2013
2012
2014
Balance, beginning of year
Charged to provision for doubtful accounts
Write-offs
Balance, end of year
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
current market conditions to determine if the cost of
finished goods inventories exceed current market
prices and impairs the cost basis of the inventory
accordingly. Historically, the Company recorded a
provision
inventory.
Impairment or provisions are based primarily on
forecasts of product demand, historical trends, market
conditions, production or procurement requirements
and technological developments and advancements.
obsolete
excess
and
for
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,
is calculated using the straight-line method over the
asset’s estimated useful life as follows:
52
$
872
481
(506)
$
714
570
(412)
$
571
512
(369)
$
847
$
872
$
714
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
Property and equipment are reviewed for impairment
on an annual basis or whenever events or changes in
circumstances indicate the carrying value of an asset
or asset group may not be recoverable. Indicative
events or circumstances include, but are not limited
to, 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. Upon sale or other disposition
of an asset, the 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.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Internal Use Computer Software Costs
the
application
development
Direct costs incurred to purchase and develop
computer software for internal use are capitalized
during
and
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
useful
life of the software beginning when the
software project is substantially complete and placed
in service. Costs incurred during the preliminary
project stage and costs for training, data conversion
and maintenance are expensed as incurred.
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 $4.1 million at
December 31, 2014.
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
The
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,
based
is
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.
assessment,
qualitative
this
on
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,
value estimates,
the Company uses the income
approach based on discounted cash flow analyses,
combined with a market-based approach. The
market-based
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 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
relationships,
trademarks and brand names and
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.
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
changes
events
or
53
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 future cash flows
(undiscounted and without interest charges) is less
loss is
than the carrying amount, an impairment
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.
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.
The Company assesses whether an indefinite lived
intangible impairment exists using both qualitative
assessments. The qualitative
and quantitative
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
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
any
and
assumed,
liabilities
excess of
acquisitions
consolidated
of
date
The Company includes the results of operations of
results,
in
its
its
acquisition.
from the
prospectively
Acquisitions are accounted for by applying the
acquisitions method. The Company allocates the
fair value of purchase consideration to the assets
non-
acquired,
controlling interests in the acquired entity generally
based on their fair values at the acquisition date.
The
fair value of purchase
consideration over the fair value of these assets
non-
and
assumed
liabilities
acquired,
controlling interests
in the acquired entity is
recorded as goodwill. The primary items that
generate goodwill include the value of the synergies
between the acquired company and Flotek and the
acquired assembled workforce.
value of
Acquisition-related
recognized
expenses
separately from the business acquisition and are
recognized as expenses as incurred.
any
the
the
are
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
54
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3).
(level
inputs
“Level
“Level
prices in active markets for identical assets or
liabilities (level 1) and the lowest priority to
unobservable
1”
measurements are measurements using quoted
prices in active markets for identical assets and
are
2”
liabilities.
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 a company to develop its own
assumptions. When determining the fair value of
assets and liabilities, the Company uses the most
reliable measurement available.
measurements
Revenue Recognition
sales
for product
and services
is
Revenue
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
or other
significant post-delivery obligations.
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
and material costs, as well as,
indirect costs of
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
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. LIH revenue
totaled $4.7 million, $5.9 million and $4.2 million
for the years ended December 31, 2014, 2013 and
2012, 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
the primary
prepared using the
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
expense
reporting
transactions
average
monthly exchange rate for the reporting period.
Resultant translation adjustments are recognized as
(loss) within
other
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
comprehensive
stockholders. The Company’s
income (loss)
income and foreign
currency translation adjustments.
and distributions
includes net
from,
55
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development Costs
Expenditures for
research activities relating to
product development and improvement are charged
to expense as incurred.
Income Taxes
The Company has two U.S. tax filing groups which
tax returns. Taxable
file separate U.S. Federal
income of one return cannot be offset by tax
attributes,
including net operating losses, of the
other return.
are
tax
future
recognized for
liability method in
the
The Company uses
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
temporary
anticipated
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
deferred
exists
tax
regarding their realization.
assets when
uncertainty
effects
of
recorded to reduce
A valuation allowance is
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
significant
negative
as
56
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.
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
tax liability on these
deferred U.S.
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 of convertible notes and convertible
preferred stock.
equivalents,
effect
the
if
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
share-based compensation expense
assessments,
and valuation allowances for accounts receivable,
inventories, and deferred tax assets.
Reclassifications
Certain prior year amounts have been reclassified to
conform to the current year presentation. The
reclassifications did not impact net income.
Capitalization of Interest
New Accounting Pronouncements
of
software
development
Interest costs are capitalized for qualifying in-
projects.
process
Capitalization
commences when
interest
activities to prepare the asset are in progress, and
are being
expenditures
and borrowing costs
the
incurred. Interest costs are capitalized until
assets are ready for 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.
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
financial
statements
preparation
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.
and liabilities
assets
to
items
Significant
and
subject
assumptions include application of the percentage-
of-completion method of revenue recognition, the
carrying amount and useful lives of property and
impairment
equipment
intangible
estimates
assets,
and
(a) Application of New Accounting Standards
Effective January 1, 2014, the Company adopted
the accounting guidance in Accounting Standards
Update (“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 provides
guidance for reporting unrecognized tax benefits
when a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward exists at the
reporting
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.
Implementation of this standard did not have a
material
consolidated financial
statements.
effect on the
date. The
guidance
requires
(b) New Accounting Requirements and
Disclosures
Plant,
In April 2014, the Financial Accounting Standards
issued ASU No. 2014-08,
Board (“FASB”)
of Financial
“Presentation
and
Statements
Equipment—Reporting
Property,
and
of
and Disclosures
Discontinued Operations
Disposals of Components of an Entity,” which
amends the definition of a discontinued operation
by raising the threshold for a disposal to qualify as
discontinued operations. The ASU will also require
entities to provide additional disclosures about
disposal
discontinued
transactions that do not meet
the discontinued
operations criteria. The pronouncement is effective
prospectively for all disposals (except disposals
classified as held for sale before the adoption date)
operations
as well
as
57
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of components initially classified as held for sale in
periods beginning on or after December 15, 2014.
Early adoption is permitted. The Company is
currently evaluating this guidance and does not
expect that adoption will have a material effect on the
consolidated financial statements.
the
supersede most of
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers.” The ASU
existing revenue
will
recognition requirements in U.S. GAAP and will
require entities to recognize revenue at an amount
that reflects the consideration to which the Company
expects to be entitled in exchange for transferring
goods or services to a customer. The new standard
also requires
significantly expanded disclosures
regarding the qualitative and quantitative information
of an entity’s nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with
is effective for
customers. The pronouncement
annual
after
beginning
periods
December 15, 2016, including interim periods within
that
applied
retrospectively, with early application not permitted.
The Company is currently evaluating the impact the
pronouncement will have on the
consolidated
financial statements and related disclosures.
reporting
reporting
period
and
be
to
is
Note 3 — Acquisitions
On May 10, 2013, the Company acquired Florida
Chemical Company, Inc. (“Florida Chemical”), one
of the world’s largest processors of citrus oils and a
pioneer in solvent, chemical synthesis, and flavor and
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,
58
requisite
In June 2014, the FASB issued ASU No. 2014-12,
“Accounting for Share-Based Payments When the
Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service
Period.” The ASU requires that a performance target
that affects vesting and that could be achieved after
treated as
the
a
service period be
performance condition. As such,
the performance
target should not be reflected in estimating the grant-
date fair value of the award. The ASU is effective for
annual
after
periods
December 15, 2015, with early adoption permitted.
The Company is evaluating the potential impacts of
existing stock-based
the new standard on its
compensation plans.
beginning
reporting
In November 2014, the FASB issued ASU No. 2014-
17, “Business Combinations: Pushdown Accounting.”
This ASU provides companies with the option to
apply pushdown accounting in its separate financial
statements upon occurrence of an event in which an
acquirer obtains control of the acquired entity. The
election to apply pushdown accounting can be made
either in the period in which the change of control
occurred, or in a subsequent period. This ASU is
effective on November 18, 2014. Implementation of
this standard is not expected to have a material effect
on the consolidated financial statements.
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 was 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
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
liabilities assumed in the acquisition. The allocation
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
Total purchase price allocation
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
$
331
15,574
13,400
6,750
205
29,270
12,670
14,080
39,328
(25,170)
$
106,438
reflect
may be obtained in the future. Also, this financial
the cost of any
information does not
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
$
$
$
59
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
the
and
industrial
consumer
Current deferred tax assets were increased by $1.2
million with a corresponding decrease to goodwill
within
chemical
technologies reporting unit. This final adjustment
was not significant relative to the total consideration
paid for Florida Chemical and, therefore, the final
adjustment has not been retrospectively applied to the
Company’s balance sheet as of December 31, 2013.
This adjustment, if recorded in 2013, would have had
no impact on the 2013 consolidated statements of
operations and cash flows.
On January 1, 2014, the Company acquired 100% of
the membership interests in Eclipse IOR Services,
LLC (“EOGA”), a leading Enhanced Oil Recovery
(“EOR”) design and injection firm, for $5.3 million
in cash consideration, net of cash received, 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 has been combined with the Company’s
existing EOR products and services.
common
On April 1, 2014, the Company acquired 100% of the
membership interests in SiteLark, LLC (“SiteLark”)
for $0.4 million in cash and 5,327 shares of the
provides
Company’s
reservoir engineering and modeling services for a
variety of hydrocarbon applications.
Its services
include proprietary software which assists engineers
with reservoir simulation, reservoir engineering and
waterflood optimization.
stock. SiteLark
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. Results of Florida
Chemical’s operations are included in the Company’s
consolidated financial statements from the date of
acquisition. The Company’s consolidated statements
of operations for the year ended December 31, 2013
include $50.9 million of revenue and $10.0 million of
income from operations related to the operations of
Florida Chemical.
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.
During the quarter ended September 30, 2014, the
Company identified and recorded a final adjustment
related to the acquisition of Florida Chemical.
60
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
Year ended December 31,
2013
2014
2012
Supplemental non-cash investing and financing activities:
Value of common stock issued in acquisitions
Final Florida Chemical acquisition adjustment
Fair value of warrant liability reclassified to additional paid-in
capital
Value of common stock issued in payment of accrued liability
Equipment acquired through capital leases
Exercise of stock options by common stock surrender
Supplemental cash payment information:
Interest paid
Income taxes paid
$ 2,043
1,162
$52,711
-
$
-
-
-
600
-
1,198
-
-
754
3,907
13,973
-
1,263
-
$ 1,285
22,389
$ 1,859
17,783
$ 5,521
14,049
Note 5 — Revenue
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):
Year ended December 31,
2013
2012
2014
Revenue:
Products
Rentals
Services
Cost of Revenue:
Products
Rentals
Services
Depreciation
$
354,356
65,549
29,252
$
282,639
62,042
26,384
$
224,777
67,938
20,113
$
449,157
$
371,065
$
312,828
$
214,417
31,285
12,385
8,111
$
180,800
24,987
9,916
7,835
$
135,367
30,618
8,051
7,173
$
266,198
$
223,538
$
181,209
61
FLOTEK INDUSTRIES, INC.
NOTES TO 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
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
December 31,
2014
$31,581
3,129
51,248
85,958
-
$85,958
2013
$13,953
1,904
50,019
65,876
(2,744)
$63,132
Year ended December 31,
2013
2012
2014
Balance, beginning of year
Charged to costs and expenses
Deductions
Balance, end of the year
$ 2,744
358
(3,102)
-
$
$ 2,752
1,330
(1,338)
$ 2,744
$ 2,679
882
(809)
$ 2,752
At December 31, 2014, the Company recorded a $2.0 million write-down of inventory to recognize impairment
of all items identified and included in the reserve for excess and obsolete inventory. At December 31, 2012, the
Company recorded a $1.2 million write-down of inventory with a 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
2014
2013
$
6,780
33,765
80,731
7,299
2,528
6,566
7,605
145,274
(59,163)
$ 86,111
$
5,088
32,269
71,073
4,601
2,400
6,340
7,617
129,388
(50,274)
$ 79,114
Depreciation expense, including expense recorded in cost of revenue, totaled $13.1 million, $11.2 million and
$9.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.
During the years ended December 31, 2014, 2013 and 2012, no impairments were recognized related to property
and equipment.
62
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Goodwill
The Company had five reporting units, Energy
Chemical Technologies, Consumer and Industrial
Chemical Technologies, Drilling Tools, Teledrift®,
and Production Technologies, of which only three
had an existing goodwill balance at December 31,
2014. For segment reporting purposes, Downhole
Tools and the Teledrift® reporting units are included
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
the Company identified two separate
process,
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. During the year ended December 31,
2014,
the Company recorded a final adjustment
related to the acquisition of Florida Chemical that
reduced goodwill by $1.2 million (see Note 3). The
net 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 during the years ended
December 31, 2014, 2013 and 2012, 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):
Consumer
and
Industrial
Chemical
Technologies
Energy
Chemical
Technologies
$
11,610
-
11,610
$
-
-
-
-
18,686
30,296
-
30,296
-
6,022
36,318
-
-
20,642
20,642
-
20,642
-
(1,162)
19,480
-
Downhole
Tools
Teledrift®
Production
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
-
39,328
146,204
(79,933)
66,271
-
4,860
43,009
(43,009)
46,396
(31,063)
5,861
(5,861)
151,064
(79,933)
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
Goodwill balance, net
Activity during the year 2014:
Goodwill impairment
recognized
Acquisition goodwill recognized
Balance at December 31, 2014:
Goodwill
Accumulated impairment losses
Goodwill balance, net
$
36,318
$ 19,480
$
-
$
15,333
$
-
$
71,131
63
FLOTEK INDUSTRIES, INC.
NOTES TO 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
Trademarks and brand names
Other
Total finite lived intangible assets acquired
Deferred financing costs
Total amortizable intangible assets
Indefinite lived intangible assets:
Trademarks and brand names
Total other intangible assets
Carrying value:
December 31,
2014
Cost
Accumulated
Amortization
Cost
2013
Accumulated
Amortization
$ 3,244
9,018
2,053
-
14,315
169
$14,484
$20,061
52,607
7,191
-
79,859
1,655
81,514
11,630
$93,144
$ 4,569
11,829
2,706
-
19,104
512
$19,616
$18,996
52,607
7,191
191
78,985
1,392
80,377
11,630
$92,007
Other intangible assets, net
$73,528
$77,523
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. Amortization of
these other
intangible assets will not be deductible for income
tax purposes.
Intangible assets acquired are amortized on a
straight-line basis over two to 20 years. Amortization
of intangible assets acquired totaled $4.8 million,
$3.9 million and $2.1 million for the years end ended
December 31, 2014, 2013 and 2012, respectively.
Amortization of deferred financing costs totaled $0.3
million, $0.2 million and $0.9 million for the years
ended December 31, 2014, 2013 and 2012,
respectively. During the years ended December 31,
2013 and 2012,
the carrying value of deferred
financing costs was reduced by less than $0.1 million
and by $1.8 million, respectively, upon repayments
of the Company’s convertible senior notes.
64
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated future amortization expense for other intangible assets,
December 31, 2014 is as follows (in thousands):
including deferred financing costs, at
Year ending December 31,
2015
2016
2017
2018
2019
Thereafter
Other intangible assets, net
$
5,104
4,872
4,718
4,457
4,247
38,500
$ 61,898
During the years ended December 31, 2014, 2013 and 2012, no impairments were recognized related to other
intangible assets.
Note 10 — Long-Term Debt and Credit Facility
Long-term debt is as follows (in thousands):
Long-term debt:
Borrowings under revolving credit facility
Term loan
Total long-term debt
Less current portion of long-term debt
Long-term debt, less current portion
Credit Facility
On May 10, 2013, the Company and certain of its
subsidiaries (the “Borrowers”) 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, the Company (a) may borrow up
to $75 million under a revolving credit facility and
(b) has borrowed $50 million under a term loan.
The Credit Facility is secured by substantially all of
the Company’s domestic real and personal property,
65
December 31,
2014
2013
$ 8,500
$ 16,272
35,541
45,833
44,041
62,105
(18,643)
(26,415)
$ 25,398
$ 35,690
and
both
before
earnings
accounts
inventory,
receivable,
affirmative
land,
including
buildings, equipment and other intangible assets. The
Credit Facility contains customary representations,
warranties,
and negative
covenants, including a financial covenant to maintain
taxes,
consolidated
depreciation and amortization (“EBITDA”) to debt
ratio of 1.10 to 1.00, a financial covenant to maintain a
ratio of funded debt to adjusted EBITDA of not greater
limit on capital
than 4.0 to 1.0, and an annual
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.
interest,
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2014, the excess cash flow exceeded
$3.0 million. Consequently, the Company will pay
$3.0 million on its term loan balance to PNC Bank
by March 2, 2015. This amount is classified as
current debt at December 31, 2014.
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
and
Company’s domestic
inventory.
receivable
accounts
At December 31, 2014, eligible accounts receivable
and inventory securing the revolving credit facility
provided availability of $66.3 million under the
revolving credit
facility. Available borrowing
capacity, net of outstanding borrowings, was $57.8
million at December 31, 2014.
The interest rate on borrowings under the revolving
credit facility varies based on the level of borrowing
under the Credit Facility. Rates range (a) between
PNC Bank’s base lending rate plus 0.5% to 1.0% or
(b) between the London Interbank Offered Rate
(LIBOR) plus 1.5% to 2.0%. PNC Bank’s base
lending rate was 3.25% at December 31, 2014. The
Company is required to pay a monthly facility fee
of 0.25% on any unused amount under
the
commitment
averages. At
on
December 31, 2014, $8.5 million was outstanding
under the revolving credit facility, borrowed as base
rate loans at an interest rate of 3.75%.
based
daily
Borrowings under the revolving credit facility are
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.
The interest rate on the term loan varies based on
the level of borrowing under the 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, 2014, $35.5
million was outstanding under the term loan, with
$0.5 million borrowed as base rate loans at an
interest rate of 4.50% and $35.0 million borrowed
as LIBOR loans at an interest rate of 2.41%.
Repaid Convertible Notes
The Company’s convertible notes have consisted of
Convertible Senior Unsecured Notes
(“2008
Notes”) and Convertible Senior Secured Notes
(“2010 Notes”). During 2012,
the Company
repurchased $65.3 million of the outstanding 2008
Notes and all $36.0 million of the outstanding 2010
Notes for cash equal
to the original principal
amount and a total premium of $2.1 million, plus
accrued and unpaid interest. As a result of these
the Company recognized a loss on
transactions,
extinguishment of debt of $7.3 million, consisting
of the cash premium and the write-off of unaccreted
discount and unamortized debt financing costs.
On February 15, 2013, the Company repurchased
the remaining $5.2 million of outstanding 2008
Notes for cash equal
to the original principal
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.
66
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is
Inc.,
holding
guaranteed
convertible
company with
by
notes were
The
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
subsidiaries of
the Company that were not
guarantors were deemed to be “minor” subsidiaries
in accordance with SEC Regulation S-X, Rule 3-10,
“Financial Statements of Guarantors and Issuers of
Guaranteed
or Being
Securities Registered
Registered.”
Share Lending Agreement
Concurrent with the offering of the 2008 Notes, the
Company entered into a share lending agreement
(the
the
“Share Lending Agreement”) with
underwriter (the “Borrower”). The Company loaned
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
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
law
for
or
paid
other
declared
distributions
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
or
on
outstanding shares of common stock. Under the
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 of the loan of Borrowed Shares, any
other distribution, in liquidation or otherwise, that
the Company made on the Borrowed Shares.
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 of 1933, as amended. 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.
Through December 31, 2012, the Borrower returned
1,360,442 shares of
the Company’s borrowed
common stock. On January 22, 2013, the remaining
2,439,558 shares of the Company’s common stock
were returned to the Company and the Share
Lending
No
consideration was paid by the Company for the
return of the Borrowed Shares.
terminated.
Agreement
was
Shares that had been loaned under
Lending Agreement were
outstanding for
reporting earnings per common share.
the Share
considered
not
the purpose of computing and
67
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Maturities
Maturities of long-term debt at December 31, 2014 are as follows (in thousands):
Year ending December 31,
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
value
available
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
that
reporting entity’s
assumptions about the inputs.
are based on the
Revolving
Credit
Facility
$
8,500
-
-
-
Term Loan
Total
$
10,143
7,143
7,143
11,112
$
18,643
7,143
7,143
11,112
$
8,500
$
35,541
$
44,041
Liabilities Measured at Fair Value on a Recurring
Basis
At December 31, 2014 and 2013, 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, 2014 and 2013.
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
liability is no longer
required following the
contractual amendment.
During the years ended December 31, 2014 and
2013, there were no transfers in or out of the Level 3
hierarchy.
68
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Measured at Fair Value on a Nonrecurring
Basis
Fair Value of Other Financial Instruments
and
assets,
goodwill
equipment,
including
The Company’s non-financial
property
other
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, 2014, 2013 and 2012.
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, 2014 or 2013.
The carrying value and estimated fair value of the Company’s long-term debt are as follows (in thousands):
December 31,
2014
2013
Carrying Value
Fair Value
Carrying Value
Fair Value
Borrowings under revolving credit facility
Term loan
$
8,500
35,541
$
8,500
35,541
$
16,272
45,833
$ 16,272
45,833
The carrying value of borrowings under the revolving credit facility and the term loan approximate their fair
value because the interest rate is variable.
Note 12 — Earnings Per Share
Basic earnings per common share is calculated by
dividing net income by the weighted average number
of common shares outstanding for the period. Diluted
earnings per common share is calculated by dividing
the effect of assumed
net
conversion of convertible notes, by the weighted
average number of common shares outstanding
combined with dilutive common share equivalents
outstanding, if the effect is dilutive.
income, adjusted for
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). Contractual undertakings of the
Borrower had the effect of substantially eliminating
the economic dilution that otherwise would result
from the issuance of the Borrowed Shares, and all
the Share Lending
under
shares
Agreement were
contractually obligated to be
returned to the Company. As a result, shares loaned
outstanding
the Share Lending Agreement were not
under
considered outstanding for the purpose of computing
and reporting earnings per common share. The Share
Lending Agreement was terminated on January 22,
2013 upon the return of all Borrowed Shares to the
Company.
On February 15, 2013, the Company repurchased the
remaining $5.2 million of outstanding 2008 Notes for
the Company no
cash. Following this repurchase,
longer has any outstanding convertible senior notes.
For
the
the year ended December 31, 2013,
Company’s convertible notes were excluded from the
calculation of diluted earnings per common share as
inclusion was anti-dilutive. In addition, for the years
ended December 31, 2013 and 2012, approximately
0.1 million stock options with an exercise price in
excess of the average market price of the Company’s
common stock were excluded from the calculation of
diluted earnings per common share.
69
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted earnings per common share are as follows (in thousands, except per share data):
Year ended December 31,
2013
2012
2014
Net income attributable to common stockholders—Basic
Impact of assumed conversions:
$
53,603
$
36,178
$
49,791
Interest on convertible notes
-
-
1,959
Net income attributable to common stockholders—Diluted
$
53,603
$
36,178
$
51,750
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 senior notes
54,511
51,346
48,185
121
880
14
-
1,355
1,133
7
-
1,560
992
116
2,701
Weighted average common shares outstanding—Diluted
55,526
53,841
53,554
Basic earnings per common share
Diluted earnings per common share
$
$
0.98
0.97
$
$
0.70
0.67
$
$
1.03
0.97
Note 13 — Income Taxes
Components of the income tax expense (benefit) are as follows (in thousands):
Year ended December 31,
2013
2012
2014
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Total deferred
Income tax expense (benefit)
$21,468
684
1,627
$15,225
3,322
1,432
$ 12,072
1,450
891
23,779
19,979
14,413
2,573
(1,071)
1,502
1,336
(543)
(18,836)
90
793
(18,746)
$25,281
$20,772
$ (4,333)
70
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:
Year ended December 31,
2013
2012
2014
Federal statutory tax rate
State income taxes, net of federal benefit
Return to accrual adjustments
Change in valuation allowance
Warrant liability fair value adjustment
Domestic production activities deduction
Other
Effective income tax rate
35.0%
2.3
(0.9)
-
-
(2.5)
(1.9)
32.0%
35.0%
2.8
0.2
-
-
(2.6)
1.1
36.5%
35.0%
2.3
(1.3)
(41.0)
(2.0)
(3.0)
0.5
(9.5)%
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no
associated income tax impact and existing deferred tax asset valuation allowances. The change in the effective
tax rate in 2014 resulted primarily from changes in state apportionment factors, including the effect on state
deferred tax assets and liabilities.
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
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
71
$
December 31,
2014
2013
$
10,183
369
1,896
4,146
75
1
16,670
(809)
15,861
(12,066)
(9,823)
(4,126)
(225)
11,665
383
1,503
3,693
598
1
17,843
(856)
16,987
(12,374)
(9,587)
(5,020)
(47)
(26,240)
(27,028)
$
(10,379)
$ (10,041)
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
During the year ended December 31, 2014,
the
Company recorded a final adjustment related to the
acquisition of Florida Chemical that increased current
deferred tax assets by $1.2 million (see Note 3).
As of December 31, 2014, the Company had U.S. net
operating loss carryforwards of $26.3 million, expiring
in various amounts in 2028 through 2030. The ability
to utilize net operating losses and other tax attributes
could be subject
limitation if the
to a significant
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 did not have
sufficient positive evidence to overcome the existence
of a cumulative loss in Group B and thus, 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 after adjusting for certain
items not indicative of future performance. Based on
$
December 31,
2014
2,696
12,907
(25,982)
$
2013
2,522
15,102
(27,575)
$
(10,379)
$
(10,041)
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 valuation allowance by $16.5 million at
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, 2014 in certain state jurisdictions, the
Company has determined that a valuation allowance of
$0.8 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, 2014, the Company had approximately
$2.9 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, 2014 which
are the years ended December 31, 2011 through
December 31, 2014 for U.S. federal taxes and the
through
years
December 31, 2014 for state tax jurisdictions.
ended December
2010
31,
The Company’s policy is to record penalties and
interest related to income tax matters as income tax
expense.
72
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Convertible Preferred Stock and Stock
Warrants
In August 2009,
the Company sold convertible
preferred stock with detachable warrants to purchase
In
shares of
its
February
contractual
all
outstanding shares of convertible preferred stock into
shares of common stock. Currently, the Company has
no issued or outstanding shares of preferred stock.
the Company’s
2011,
right
common stock.
exercised
convert
the Company
to mandatorily
the issuance date,
Due to the anti-dilution price adjustment provisions
established at
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 warrant agreements were modified to
eliminate the anti-dilution price adjustment provisions of
the warrants and remove the cash settlement provisions
in the event of a change of control. The amended
warrants then qualified 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
Note 15 — Common Stock
liability of $14.0 million was reclassified to additional
paid-in capital on June 14, 2012. There were no longer
fair value adjustments because the warrants continued 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.
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
million, respectively.
respectively, of
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 this exercise,
the Company no longer has any outstanding warrants.
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 in purchase of Florida Chemical Company, Inc.
Issued in purchases of Eclipse IOR Services, LLC and SiteLark, LLC
Issued in payment of accrued liability
Issued upon exercise of warrants
Issued from restricted stock units
Issued as restricted stock award grants
Issued upon exercise of stock options
Retirement of treasury shares
Year ended December 31,
2014
58,265,911
-
99,681
27,101
1,277,250
-
525,120
311,954
(5,873,291)
2013
53,123,978
3,284,180
-
-
267,000
217,089
802,164
571,500
-
Shares issued at the end of the year
54,633,726
58,265,911
73
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Incentive Plans
Stockholders approved long term incentive plans in
2014, 2010, 2007, 2005 and 2003 (the “2014 Plan,”
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 2014 Plan, 2010 Plan, 2007
Plan and 2005 Plan are 2.7 million, 6.0 million,
2.2 million
respectively. A
1.9 million,
the Company had a total of
December 31, 2014,
2.3 million shares remaining to be granted under the
2014 Plan, 2010 Plan, 2007 Plan and 2005 Plan.
Shares may no longer be granted under the 2003 Plan.
and
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
that cannot 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 2014, 2013 or 2012.
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
the fair value
assumptions can materially affect
calculation. The Company’s
not
are
characteristic of traded options; therefore, the option
valuation models do not necessarily provide a
reliable measure of the fair value of options.
options
Stock option activity for the year ended December 31, 2014 is as follows:
Options
Outstanding as of January 1, 2014
Exercised
Forfeited
Expired
Outstanding as of December 31, 2014
Vested or expected to vest at
December 31, 2014
Options exercisable as of
December 31, 2014
Weighted-Average
Exercise
Price
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic Value
$
$
$
$
4.95
5.32
17.58
-
4.81
1.81
$
21,497,484
4.81
1.81
$
21,497,484
4.81
1.81
$
21,497,484
Shares
1,864,042
(311,954)
(7,128)
-
1,544,960
1,544,960
1,544,960
74
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total intrinsic value of stock options exercised
during the years ended December 31, 2014, 2013 and
2012 was $6.0 million, $5.6 million and $0.6 million,
respectively. The total fair value of stock options
vesting during the years ended December 31, 2014
was less than $0.1 million, and was $4.2 million and
$0.5 million for the years ended December 31, 2013
and 2012, respectively.
At December 31, 2014, the Company had recognized
all compensation expense related to stock options.
Restricted Stock
The Company grants employees either time-vesting
or performance-based restricted shares in accordance
specified in the Restricted Stock
with terms
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,
and if,
the outlined performance criteria are met.
ended December 31, 2014,
During the year
approximately 62% 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
Restricted stock share activity for the year ended December 31, 2014 is as follows:
Restricted Stock Shares
Non-vested at January 1, 2014
Granted
RSAs converted from 2013 restricted stock units
Vested
Forfeited
Shares
1,067,655
349,544
175,576
(705,566)
(60,691)
Non-vested at December 31, 2014
826,518
$
Weighted-
Average Fair
Value at Date of
Grant
$
12.78
27.29
16.35
13.65
14.89
18.78
At December 31, 2014, there was $10.7 million of
unrecognized compensation expense related to non-
vested
unrecognized
stock.
compensation expense is expected to be recognized
over a weighted-average period of 1.8 years.
restricted
The
The weighted-average grant-date
fair value of
restricted stock granted during the years ended
December 31, 2014, 2013 and 2012 was $27.29,
$15.17 and $11.03 per share, respectively. The total
fair value of restricted stock that vested during the
years ended December 31, 2014, 2013 and 2012 was
$10.2 million, $8.4 million and $5.4 million,
respectively.
75
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Units
During the year ended December 31, 2014,
the
Company granted performance-based restricted stock
units (“RSUs”) that will be converted into 352,254
shares of common stock. These shares, which will be
issued as RSAs, will vest in equal one-half tranches
on December 31, 2015 and 2016.
Restricted stock unit share activity for the year ended December 31, 2014 is as follows:
Restricted Stock Unit Shares
RSU share equivalents at January 1, 2014
2013 RSUs converted to RSAs in 2014
Share equivalents earned in 2014
RSU share equivalents at December 31, 2014
At December 31, 2014, there was $6.8 million of
unrecognized compensation expense related to 2014
restricted
unrecognized
compensation expense is expected to be recognized
over a weighted-average period of 2.0 years.
units.
stock
The
Weighted-
Average Fair
Value at Date of
Grant
$
$
16.35
16.35
24.66
24.66
Shares
175,576
(175,576)
352,254
352,254
plan during the years ended December 31, 2014,
2013 and 2012 was $1.1 million, $0.9 million and
$0.2 million, respectively. The employee payment
associated with participation in the plan was satisfied
through payroll deductions.
Employee Stock Purchase Plan
Share-Based Compensation Expense
The Company’s Employee Stock Purchase Plan
(ESPP) was approved by stockholders on May 18,
2012. The 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 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 under the
plan is recognized as share-based compensation
expense and was $0.2 million, $0.1 million and less
ended
during
than
December 31, 2014, 2013 and 2012, respectively.
The total fair value of the shares purchased under the
$0.1 million
years
the
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 $10.5 million, $10.9 million and $13.4
million during the years ended December 31, 2014,
2013 and 2012, respectively.
Treasury Stock
The Company accounts for treasury stock using the
cost method and includes
treasury stock as a
component of stockholders’ equity. During the years
ended December 31, 2014 and 2013, the Company
and 448,121 shares,
purchased 243,005 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. During
the years ended December 31, 2014 and 2013, shares
surrendered for the exercise of stock options were
46,208 and 237,267, respectively. These surrendered
shares are also accounted for as treasury stock.
76
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2013, JP
Morgan Chase & Co. returned 2,439,558 shares of
the Company’s
common stock that had been
borrowed under the Share Lending Agreement. These
shares were then included in treasury stock.
Retirement of Treasury Stock
On December 31, 2014,
the Company retired
its treasury stock with an
5,873,291 shares of
aggregate cost of $32.6 million. The retirement was
recorded as reductions of $32.6 million in treasury
stock, $1,000 in common stock and $32.6 million in
additional paid-in capital.
All retired treasury shares are canceled and returned
to the status of authorized but unissued shares. The
retirement of treasury stock had no impact on the
Company’s total consolidated stockholder’s equity.
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.
Operating Lease Commitments
The Company has operating leases for office space,
vehicles and equipment. Future minimum lease
payments under operating leases at December 31,
2014 are as follows (in thousands):
Year ending December 31,
2015
2016
2017
2018
2019
Thereafter
Total
Minimum
Lease
Payments
$
2,440
2,647
2,274
2,060
1,869
13,918
$
25,208
77
Stock Repurchase Program
of
common
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
In
negotiated
December 2014, the Company repurchased 621,176
shares of its outstanding common stock on the open
inclusive of
market at a cost of $10.4 million,
transaction costs, or an average price of $16.74 per
share.
transactions.
privately
As of December 31, 2014, the Company has $14.6
million
repurchase
program.
remaining
under
share
its
Rent expense under operating leases totaled $2.2
million, $1.7 million and $1.9 million during the
years ended December 31, 2014, 2013 and 2012,
respectively.
401(k) Retirement Plan
The Company maintains a 401(k) retirement plan for
the benefit of eligible employees in the U.S. All
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,
2014, 2013 and 2012, compensation expense included
$0.7 million,
$0.5 million,
respectively, related to the Company’s 401(k) match.
$0.6 million
and
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.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is subject to significant concentrations of
credit risk within trade accounts receivable as the
Company does not generally require collateral as support
for trade receivables. In addition, the majority of the
Company’s cash is maintained at a major financial
institution and balances often exceed insurable amounts.
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
Technologies
Drilling
inspects,
manufactures and markets downhole drilling
equipment used in energy, mining, water well
and industrial drilling activities.
rents,
Production Technologies assembles and markets
including the
production-related equipment,
PetrovalveTM product
pump
components, electric submersible pumps, gas
separators, valves and services that support
natural gas and oil 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.
Note 17 — Business Segment, Geographic and
Major Customer 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
in deciding how to
operating decision-makers
allocate resources and assess performance. The
operations of the Company are categorized into four
reportable segments: Energy Chemical Technologies,
Consumer and Industrial Chemical Technologies,
Drilling Technologies and Production Technologies.
‰
‰
‰
‰
drilling,
Chemical
cementing,
Technologies
Energy
designs,
develops, manufactures, packages and markets
specialty chemicals used in oil and natural gas
completion,
well
stimulation, and production.
the
Company’s chemistries are used in specialized
enhanced and improved oil recovery markets
(“EOR” or “IOR”). Activities in this segment
also include construction and management of
automated material handling facilities
and
management of loading facilities and blending
operations for oilfield services companies.
In addition,
Consumer and Industrial Chemical Technologies
designs, develops and manufactures products
that are sold to companies in the flavor and
78
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of the reportable segments is as follows (in thousands):
As of and for the
year ended December 31,
2014
Net revenue from external
customers
Gross margin
Income (loss) from operations
Depreciation and amortization
Total assets
Capital expenditures
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
Geographic Information
Energy
Chemical
Technologies
Consumer and
Industrial
Chemical
Technologies
Drilling
Technologies
Production
Technologies
Corporate
and
Other
Total
$268,761
117,867
84,846
4,401
156,596
6,983
$200,932
88,536
65,396
3,160
127,119
5,225
$183,986
81,438
65,440
1,765
59,195
3,553
$51,091
12,897
6,558
2,138
87,412
115
$42,927
10,659
6,260
1,126
86,640
183
$
-
-
-
-
-
-
$113,302
45,651
19,022
9,808
147,584
9,626
$112,406
43,156
18,306
9,632
135,738
6,326
$116,736
45,709
22,282
9,115
118,771
12,264
$16,003
6,544
3,246
327
21,843
942
$14,800
5,176
3,060
250
16,647
1,749
$12,106
4,472
3,395
206
11,189
77
$
-
-
(32,784)
1,174
9,841
2,241
$449,157
182,959
80,888
17,848
423,276
19,907
$
-
-
(34,296)
941
9,437
1,524
$371,065
147,527
58,726
15,109
375,581
15,007
$
-
-
(32,496)
497
30,712
4,807
$312,828
131,619
58,621
11,583
219,867
20,701
Revenue by country is based on the location where services are provided and products are used. 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,
2013
2014
$
$
370,087
79,070
449,157
$
$
319,649
51,416
371,065
$
$
2012
272,945
39,883
312,828
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial
statements.
79
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:
Year ended December 31,
2013
2012
2014
Customer A
Customer B
16.1%
*
16.2%
*
15.6%
10.0%
* This customer did not account for more than 10% of revenue.
Over 94% of the revenue from major customers noted above was from the Energy Chemical Technologies
segment.
Note 18 — Quarterly Financial Data (Unaudited)
2014
Revenue
Gross margin
Net income
Earnings per share (1):
Basic
Diluted
2013
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)
$
$
$
$
$
$
102,575
43,681
12,018
0.22
0.22
78,243
32,630
7,765
0.16
0.15
$
$
$
$
$
$
105,318
42,310
11,041
0.20
0.20
93,586
37,594
8,440
0.17
0.16
$
$
$
$
$
$
116,761
46,078
14,272
0.26
0.26
98,388
37,502
8,968
0.17
0.16
$
$
$
$
$
$
124,503
50,890
16,272
0.30
0.29
100,848
39,801
11,005
0.21
0.20
$
$
$
$
$
$
Total
449,157
182,959
53,603
0.98
0.97
371,065
147,527
36,178
0.70
0.67
(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.
80
Management’s Report on Internal Control over
Financial Reporting
is
and maintaining adequate
The Company’s management
responsible for
internal
establishing
control over financial reporting, as defined in Rule
13a-15(f) of the Exchange Act. The Company’s
management, including the principal executive and
principal financial officers, assessed the effectiveness
of internal control over financial reporting as of
December 31, 2014, based on criteria issued by the
Committee of Sponsoring Organizations of
the
Treadway Commission (2013 Framework) (“COSO”)
in “Internal Control – Integrated Framework.” Upon
evaluation,
has
concluded that the Company’s internal control over
financial reporting was effective in connection with
the
financial
the
statements as of December 31, 2014.
the Company’s management
consolidated
preparation
of
The effectiveness of the Company’s internal control
over financial reporting as of December 31, 2014 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, 2014
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
filed or
disclosed by the Company in reports
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
limitations to the effectiveness of any
inherent
system of disclosure
and procedures,
including the possibility of human error and the
circumvention
and
overriding
procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable
assurance that control objectives are attained. The
Company’s disclosure controls and procedures are
designed to provide such reasonable assurance.
controls
controls
of
or
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, 2014, 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, 2014.
81
PART III
Item 10. Directors, Executive Officers and
Corporate Governance.
Item 13. Certain Relationships and Related
Transactions, and Director Independence.
information
by
Item is
The
required
incorporated by reference
to the Company’s
Definitive Proxy Statement for the 2015 Annual
Meeting of Stockholders to be filed with the SEC
within 120 days of year end.
this
information
by
Item is
The
required
incorporated by reference
to the Company’s
Definitive Proxy Statement for the 2015 Annual
Meeting of Stockholders to be filed with the SEC
within 120 days of year end.
this
Item 11. Executive Compensation.
Item 14. Principal Accountant Fees and
Services.
information
by
Item is
The
required
incorporated by reference
to the Company’s
Definitive Proxy Statement for the 2015 Annual
Meeting of Stockholders to be filed with the SEC
within 120 days of year end.
this
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related
Stockholder Matters.
information
by
Item is
The
required
to the Company’s
incorporated by reference
Definitive Proxy Statement for the 2015 Annual
Meeting of Stockholders to be filed with the SEC
within 120 days of year end.
this
information
by
Item is
The
required
to the Company’s
incorporated by reference
Definitive Proxy Statement for the 2015 Annual
Meeting of Stockholders to be filed with the SEC
within 120 days of year end.
this
82
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
4.7
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
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).
Certificate of Designations
for Series A Cumulative Convertible Preferred Stock dated
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).
Amended and Restated Bylaws, dated December 9, 2014 (incorporated by reference to Exhibit 3.1 to
the Company’s Form 8-K filed on December 10, 2014).
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).
Amendment to Amended and Restated Warrant to Purchase Common Stock, dated as of February 5,
2014 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 11,
2014).
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).
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).
83
Exhibit
Number
10.9
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
Exhibit Title
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).
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).
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).
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).
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).
84
Exhibit
Number
10.30
10.31
10.32
10.33
10.34
10.35
10.36
Exhibit Title
Employment Agreement, dated effective February 5, 2014 between the Company and Joshua A.
Snively, Sr. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on
February 11, 2014).
Restricted Stock Agreement, dated effective February 5, 2014 between the Company and Joshua
A. Snively, Sr. (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on
February 11, 2014).
2014 Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company’s
Definitive Proxy Statement filed on April 18, 2014).
Fifth Amended and Restated Service Agreement, dated as of April 15, 2014, 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 21, 2014).
Letter Agreement, dated as of April 15, 2014, between the Company and John Chisholm
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on April 21, 2014).
Second Amendment
to Amended and Restated Revolving Credit, Term Loan and Security
Agreement dated December 5, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s
Form 8-K filed on December 10, 2014).
Employment Agreement, dated effective December 31, 2014 between the Company and Steve
Reeves (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 7,
2015).
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.
85
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: /s/
JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer and
Chairman of the Board
Date: January 27, 2015
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
January 27, 2015
John W. Chisholm
Chairman of the Board
(Principal Executive Officer)
/s/ H. RICHARD WALTON
Chief Financial Officer
January 27, 2015
H. Richard Walton
/s/ KENNETH T. HERN
Kenneth T. Hern
/s/ JOHN S. REILAND
John S. Reiland
/s/ L.V. “BUD” MCGUIRE
L.V. “Bud” McGuire
/s/ L. MELVIN COOPER
L. Melvin Cooper
/s/ CARLA S. HARDY
Carla S. Hardy
/s/ TED D. BROWN
Ted D. Brown
January 27, 2015
January 27, 2015
January 27, 2015
January 27, 2015
January 27, 2015
January 27, 2015
(Principal Financial Officer and
Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
86
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FLOTEK INDUSTRIES, INC.
LIST OF SUBSIDIARIES
EXHIBIT 21
CESI Chemical, Inc.
Oklahoma Corporation
CESI Manufacturing, LLC
Flotek Ecuador Investments, LLC
Texas Limited Liability Company
Flotek Ecuador Management, LLC
Oklahoma Limited Liability Company
Texas Limited Liability Company
Material Translogistics, Inc.
Texas Corporation
Flotek Industries FZE
Flotek Chemical Ecuador Cia. Ltda.
Ecuador Limited Liability Company
Florida Chemical Company, Inc.
Jebel Ali Free Zone Establishment
Delaware Corporation
FraxMax Analytics, LLC
FC Pro, LLC
Texas Limited Liability Company
Delaware Limited Liability Company
Padko International Incorporated
Oklahoma Corporation
Petrovalve International, Inc.
Alberta Corporation
Petrovalve, Inc.
Delaware Corporation
USA Petrovalve, Inc.
Texas Corporation
Turbeco, Inc.
Texas Corporation
Flotek Export, Inc.
Texas Corporation
Flotek Paymaster, Inc.
Texas Corporation
Teledrift Company
Delaware Corporation
Flotek International, Inc.
Delaware Corporation
FCC International, Inc.
Florida Corporation
Eclipse IOR Services, LLC
Texas Limited Liability Company
SiteLark, LLC
Texas Limited Liability Company
Flotek Gulf, LLC
Omani Limited Liability Company
Flotek Gulf Research, LLC
Omani Limited Liability Company
Flotek Industries Holding Ltd.
England and Wales Corporation
Flotek Industries UK Ltd.
England and Wales Corporation
Flotek Technologies ULC
British Columbia Unlimited Liability Company
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, 333-183617 and 333-198757) 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 January 27, 2015, relating to the consolidated financial
statements of Flotek Industries, Inc. and subsidiaries as of December 31, 2014 and 2013, and for each of the three
years in the period ended December 31, 2014, 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, 2014, as
filed with the Securities and Exchange Commission on January 27, 2015.
We also consent to the reference to our firm under the heading “Experts” in such Registration Statements.
/s/ Hein & Associates LLP
Houston, Texas
January 27, 2015
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: January 27, 2015
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: January 27, 2015
/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, 2014, 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: January 27, 2015
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, 2014, 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: January 27, 2015
/s/ H. RICHARD WALTON
H. Richard Walton
Chief Financial Officer
CORPORATE DIRECTORY
SHAREHOLDER INFORMATION
Board of Directors
John W. Chisholm
Chairman of the Board
Kenneth T. Hern
Lead Director
Chairman, Governance & Nominating Committee
Member, Compensation Committee
Member, Audit Committee
Annual Meeting
Friday, April 24, 2015 – 2:00pm CDT
Flotek Industries, Inc. Headquarters
10603 W. Sam Houston Pkwy. N.
Suite 300
Houston, TX 77064
Stock Exchange Listing
Ted Brown
Director
Member, Governance & Nominating Committee
The Company’s common stock trades
on the New York Stock Exchange,
under the symbol “FTK.”
L. Melvin Cooper
Director
Member, Compensation Committee
Member, Audit Committee
Member, Governance & Nominating Committee
Carla Schulz Hardy
Director
Chairwoman, Compensation Committee
Member, Governance & Nominating Committee
L.V. “Bud” McGuire
Director
Member, Compensation Committee
Member, Governance & Nominating Committee
John S. Reiland
Director
Chairman, Audit Committee
Member, Compensation Committee
Member, Governance & Nominating Committee
Executive Officers
John W. Chisholm
Chief Executive Officer and President
Steve Reeves
Executive Vice President, Operations
H. Richard Walton
Executive Vice President, Chief Financial Officer
Josh Snively
Executive Vice President, Research & Innovation
President of Florida Chemical Company, Inc.
Transfer Agent
American Stock Transfer & Trust Company
6201 15th Ave.
Brooklyn, New York 11219
800-937-5449
Auditors
Hein and Associates, LLP
500 Dallas St Suittee 22990000
Houston, TX 770002
713-850-9814
©2015 FLOTEK INDUSTRIES, INC
Kate Damrich Lloyd Design