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FLOTEK INDUSTRIE S 2016 ANNUAL REPORT
FLOTEK INDUSTRIES
ANNUAL MEETING
Friday, April 21, 2017
2:30 pm CDT
Flotek Industries, Inc.
Global Research &
Innovation Center
8846 N. Sam Houston Pkwy. W
Suite 150
Houston, TX 77064
STOCK EXCHANGE LISTING
The company’s common stock
trades on the New York Stock
Exchange, under the symbol
“FTK”
TRANSFER AGENT
American Stock Transfer &
Trust Company
6201 15th Ave.
Brooklyn, New York 11219
800-93 7-5449
AUDITORS
Hein & Associates LLP
500 Dallas St., Suite 2500
Houston, TX 77002
713-850-9814
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
John W. Chisholm,
Chairman of the Board
Kenneth T. Hern, Lead Director
Chairman, Governance &
Nominating Committee
Member, Compensation
Committee
Member, Audit Committee
Michelle M. Adams, Director
Appointed January 2017
Member, Governance &
Nominating Committee
Ted D. Brown, Director
Member, Governance &
Nominating Committee
Member, Compensation
Committee
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
John W. Chisholm,
Chief Executive Offi cer and
President
Joshua A. Snively, Sr.,
Executive Vice President,
Chemistry Research
President, Florida Chemical
Company, Inc.
Robert C. Bodnar, Executive
Vice President, Performance
and Transformation Offi cer
H. Richard Walton
Executive Vice President and
Chief Financial Offi cer
THE PURSUIT OF
THE PURSUIT OF
TRANSFORMATIVE
TRANSFORMATIVE
CHEMIS TRY
2016
ABOUT THE COVER:
THE UNIVERSE
Like the vastness of our universe,
chemistry is far reaching in its ability to
shape the world around us.
The molecule of d-Limonene from a
citrus tree can change the performance
of a reservoir.
The application of orange oil added to
fl avor and fragrances can transport you
to an orange grove.
At Flotek, we are creating new discoveries
that have a transformative impact. Our
vision is rooted in sustainability and
responsibility for our stakeholders,
communities and the environment.
1
VISION STATEMENT
THE PURSUIT OF
TRANSFORMATIVE
CHEMISTRY
CHEMISTRY
Behind our chemistry technology is a big vision.
A vision that guides our pursuit of transformative
chemistry, making a difference under the microscope, and
to the bottom line of our clients, to our stakeholders and
partners, and to our communities and the environment.
A vision that is being realized and brought to life through
relentless research, prescriptive technology and brilliant,
scientifi c minds with caring hearts.
At Flotek, our vision is to make a difference in science
and society.
FLOTEK INDUSTRIES 2016 ANNUAL REPORT
2
FROM THE CEO
LETTER TO SHAREHOLDERS
We are proud of our accomplishments in 2016, which were achieved while
facing enormous macro headwinds to our business.
While sales declined from the prior year, we outperformed our peers and stayed focused on
ways to best position Flotek for 2017 and beyond. As the oil and gas industry enters a period of
stabilization and recovery, and as consumer and industrial markets continue to see high demand
for more environmentally sustainable products and materials, these moves solidly place Flotek
in a position of strength and set us up for growth:
Invested in new research and
technology.
Made a strategic acquisition to drive
future growth.
Developed key global partnerships
to grow our footprint.
Began to reposition our portfolio
by divesting our Drilling
Technologies and Production
Technologies segments to focus
on two business lines, Energy
Chemistry Technologies (ECT) and
Consumer and Industrial Chemistry
Technologies (CICT), to expedite and
enable further innovations of our
prescriptive chemistry technology.
FLOTEK INDUSTRIES 2016 ANNUAL REPORT
“FLOTEK’S NANOTECH TECHNOLOGY WAS A
GAME-CHANGER FOR US IN THE SOUTHERN
DELAWARE BASIN. WITHOUT A DOUBT, IT
WAS AN IMPORTANT DRIVER IN MAKING OUR
PECOS COUNTY ACREAGE A SUCCESS.”
—ERIC HOOVER, EVP OF OPERATIONS, BRIGHAM RESOURCES
At the end of 2016, we started to see improved results, including an increase
in revenue of 9.8% in the fourth quarter compared to the previous quarter,
and an increase in revenue of 10.5% against the same quarter in 2015. Annual
revenue for our continuing operations decreased 2.7% FY16 compared to
FY15, a strong result in the face of arguably the worst downturn in the energy
industry we’ve seen in our lifetime.
3
FY16 CNF® SALES VOLUMES UP
FY16 CNF® REVENUE UP
14.7%
OVER FY15
11.6%
OVER FY15
Sales volumes of Flotek’s suite of patented Complex nano-Fluid® (CnF®)
technologies also grew 14.7% over last year. To that end, client fi nancial
transactions and testimonies, as well as increasing penetration of CnF®
chemistries, particularly in the Permian Basin, continued to demonstrate the
effi cacy of this technology to improve estimated ultimate recoveries (EURs).
Despite an overall 43% drop in completion activity last year, according to the
U.S. Energy Information Administration (EIA), year-over-year revenues from
CnF® chemistries were up 11.6%. As mentioned in our fourth quarter earnings
conference call, clients have continued to credit us with helping them boost
returns on their acreage, and these partnerships were built on a foundation of
trust, which has been mutually benefi cial.
FLOTEK INDUSTRIES 2016 ANNUAL REPORT
UKRAINE, IRAQ, CHINA
SHIPPED PRODUCTS TO
NEW INTERNATIONAL
REGIONS
HOUSTON
CORPORATE
HEADQUARTERS
CHINA
FORMED COOPERATIVE
AGREEMENT WITH ANTON
OILFIELD SERVICES
4
ARGENTINA
DEVELOPING FULL
FLUIDS SYSTEM IN
VACA MUERTA SHALE
GROWING OUR GLOBAL FOOTPRINT
In 2016, a key part of our business strategy focused on expanding our global
footprint. Highlights of our activities include:
Shipping products to China, Ukraine, and Iraq
for the fi rst time in the fourth quarter.
Collaborating with Y-TEC, the technology
arm of Argentina’s state oil company, YPF, to
develop a full fluids system for deployment in
the Vaca Muerta shale.
And, forming a cooperative agreement with
Anton Oilfi eld Services, headquartered in China,
which will further expand our international reach
to the Middle East and Asia.
FLOTEK INDUSTRIES 2016 ANNUAL REPORT
UKRAINE, IRAQ, CHINA
SHIPPED PRODUCTS TO
NEW INTERNATIONAL
REGIONS
HOUSTON
CORPORATE
HEADQUARTERS
CHINA
FORMED COOPERATIVE
AGREEMENT WITH ANTON
OILFIELD SERVICES
ARGENTINA
DEVELOPING FULL
FLUIDS SYSTEM IN
VACA MUERTA SHALE
5
ENERGY CHEMISTRY TECHNOLOGIES (ECT)
ENERGY CHEMISTRY TECHNOLOGIES (ECT)
ENERGY CHEMISTRY TECHNOLOGIES (ECT)
ENERGY CHEMISTRY TECHNOLOGIES (ECT)
ENERGY CHEMISTRY TECHNOLOGIES (ECT)
ENERGY CHEMISTRY TECHNOLOGIES (ECT)
ENERGY CHEMISTRY TECHNOLOGIES (ECT)
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF® products,
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
Flotek’s Energy Chemistry Technologies, which includes our patented suite of CnF
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
provides oilfield specialty chemicals and logistics, as well as reservoir characterization and
petroleum engineering services, to solve the toughest drilling, cementing, stimulation and
petroleum engineering services, to solve the toughest drilling, cementing, stimulation and
petroleum engineering services, to solve the toughest drilling, cementing, stimulation and
petroleum engineering services, to solve the toughest drilling, cementing, stimulation and
petroleum engineering services, to solve the toughest drilling, cementing, stimulation and
petroleum engineering services, to solve the toughest drilling, cementing, stimulation and
petroleum engineering services, to solve the toughest drilling, cementing, stimulation and
petroleum engineering services, to solve the toughest drilling, cementing, stimulation and
petroleum engineering services, to solve the toughest drilling, cementing, stimulation and
production challenges.
FY16 ECT REVENUE
FY16 ECT GROSS MARGIN
$188.2M
39.6%
CONSUMER & INDUSTRIAL CHEMISTRY TECHNOLOGIES (CICT)
Flotek’s Consumer and Industrial Chemistry Technologies delivers high-quality products that meet
the demands of a variety of consumer and industrial applications.
FY16 CICT REVENUE
$74.6M
FY16 CICT GROSS MARGIN
21.6%
FLOTEK INDUSTRIES 2016 ANNUAL REPORT
OUR INVESTMENT IN INNOVATION
AND TECHNOLOGY IS CONTINUING
TO GENERATE GROWTH AND
WILL BE AN INCREASINGLY
IMPORTANT DIFFERENTIATOR FOR
US, AS WE PURSUE NEW COGNITIVE
COMPUTATIONAL TECHNOLOGIES TO
UNCOVER KEY INSIGHTS AND TRENDS
ABOUT OUR CLIENTS’ WELLS.
6
COMMITMENT TO INNOVATION
We are also proud of our accomplishments in innovation, research and
commercialization of newly created technology.
We completed construction of our Global Research
& Innovation Center in the third quarter, located
in Houston, which helped us to secure several
new clients, as well as develop and continue
active partnerships with eight universities and
educational institutions. We believe that these
partnerships and collaboration with other
academics and industry peers can collectively
improve both our technology and service offerings
for our clients. The Global Research & Innovation
Center is symbolic of Flotek’s culture and
values—a beacon that will continue to attract and
drive further innovation and collaboration.
In fact, in our Energy Chemistry Technologies
(ECT) segment, nearly 23% of revenue came
from new technologies. This surpassed our goal
of 9% by more than a margin of 2:1, and tells us
that our investment in innovation and technology
is continuing to generate growth and will be an
increasingly important differentiator for us, as we
pursue new cognitive computational technologies
to uncover key insights and trends about our
clients’ wells, as well as how our chemistry can
better enable and protect their reservoirs.
Our focus on innovation has also yielded new patents to our intellectual
property portfolio, with more than 100 intellectual property assets now
granted or currently pending, including over 40 unique CnF® formulations.
SHARE OF ECT REVENUE FROM NEW TECHNOLOGY
NUMBER OF PATENT ASSETS
ACTUAL FY15
24.8%
VS.
GOAL
9%
ACTUAL FY16
VS.
22.8%
Eclipse IOR
Services,
LLC (EOGA) 4
Florida
Chemical 1
Flotek
Industries, Inc. 5
Flotek
Chemistry, LLC 93
TOTAL
103
FLOTEK INDUSTRIES 2016 ANNUAL REPORT
POSITIONING FOR GROWTH
As part of our strategy to position Flotek for continued growth, in the third
quarter we acquired International Polymerics, Inc. (IPI), a leading supplier
of polymers that complements our work with citrus-based nano-fluids. IPI
also contributed a strategically located staging center in the Permian Basin,
which we have turned into a micro-blending facility, and is highly beneficial for
serving our clients in this area.
7
FY16 CICT REVENUE UP
32.3%OVER FY15
In our Consumer & Industrial Chemistry
Technologies (CICT) segment, we added
two distillation units to expand our capacity
and variability to manufacture high flavor
compounds. The nutraceutical, pharmaceutical
and agricultural industries have the potential to
present unique growth opportunities for us as we
look ahead.
ABOUT 40% OF OUR ENERGY CHEMISTRY
TECHNOLOGIES REVENUE NOW COMES
THROUGH THE VIRTUAL FLOTEK STORE®.
With the opening of the FLOTEK STORE®, we
are becoming increasingly involved in creating
a chemistry experience for the well and our
clients, leveraging our Prescriptive Chemistry
ManagementTM (PCMTM) business offering. This
direct-to-end-user access allows us to work closely
with our clients to more intimately understand the
challenges they face in the oilfield, and prescribe
highly customized, total fluid systems or specific
chemistry solutions to maximize their EURs. Not
only has the FLOTEK STORE® brought greater
transparency to the market for accurate pricing of
prescriptive chemistry solutions, but about 40% of
our Energy Chemistry Technologies revenue now
comes through the virtual store—evidence that our
clients are responding to more tailored chemistry
solutions, rather than a one-size-fits-all approach.
FLOTEK INDUSTRIES 2016 ANNUAL REPORT
8
MAKING A DIFFERENCE
IN OUR COMMUNITIES
At Flotek, we pride ourselves on being able to give back to
the communities we serve.
One example of our charitable activities in 2016 was our Hunger Initiative
Campaign, which aimed to donate a percent of one month of sales to local
food banks surrounding our work in oil patches. At the conclusion of this
campaign, the Flotek Energetic Foundation™ (makingadifference.com) made
donations to food banks in Pittsburgh, Oklahoma City, Dallas, Houston,
Midland-Odessa and Denver that amounted to an estimated million
meals for families and children experiencing food insecurity. I’m proud
of our clients for taking part in that initiative, and especially proud of our
employees, who truly exemplified our vision to make a difference and
eagerly supported this work.
FLOTEK INDUSTRIES 2016 ANNUAL REPORT LOOKING AHEAD
In 2016, we made a strategic decision to fine tune our focus on our
chemistry businesses, where we’ve seen great strides in the development
of industry-disrupting innovations, like our patented suite of Complex
nano-Fluid® technologies.
This meant a departure from our drilling and production technologies segments, despite an
impressive, record-breaking fourth quarter. We are looking to divest or wind down these business
lines as we position ourselves to expand in our most promising business segments.
9
INVESTMENT THESIS
Patented suite of Complex nano-Fluid® technologies with extended
intellectual property portfolio providing proven results to increase well
performance.
Strong track record of innovative,
industry-leading R&I capabilities
and continued investment.
Extending the reach and
application of our technology to key
international growth markets.
Streamlined business model with
direct engagement with energy
chemistry customers through the
virtual FLOTEK STORE®.
Unleveraged balance sheet and
evolving to an asset-light company.
Through recent acquisitions,
advanced greater integration of
supply chain and expanded market
opportunities.
FLOTEK INDUSTRIES 2016 ANNUAL REPORT
Dawn at Florida Chemical Company,
Winter Haven, Florida
10
We are confident that 2017 will be a pivotal year for Flotek, and are expanding
our Board of Directors and leadership team to help us capitalize on the
opportunities ahead of us.
Michelle Adams, former worldwide vice president for IBM Watson Platform, joined our Board in January
2017 as part of the governance and nominating committee, and Matt Marietta, former sell-side analyst
for Stephens, Inc., joined us in March 2017 as senior vice president of corporate development and
investor relations.
As the recovery of the oil and gas industry continues, we will also be implementing a double-digit
price increase in the first quarter of 2017. While many of our peers are doing the same, we fully
expect that the FLOTEK STORE® will continue to drive transparency and competition in the market for
accurate pricing of our prescriptive chemistry technology through our direct-to-end-user advantage.
Along with all my colleagues at Flotek, I pledge to you that we are focused on delivering value for
our stakeholders, and making a difference in our field of transformative chemistry technology and
science, and in the communities where we operate.
Thank you for your continued interest and support of Flotek.
With appreciation,
JOHN W. CHISHOLM
Chairman, President & Chief Executive Officer
FLOTEK INDUSTRIES 2016 ANNUAL REPORT 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, 2016
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
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
if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
No
No
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
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
(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
Non-accelerated filer
Accelerated filer
No
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2016 (based on the closing market price
on the NYSE Composite Tape on June 30, 2016) was approximately $512,060,000. At January 31, 2017, there were 57,008,597 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 2017 Annual Meeting of Stockholders.
[THIS PAGE INTENTIONALLY LEFT BLANK]
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
5
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
Item 4.
Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
40
42
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . .
76
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
Item 9B. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
Item 10.
Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
77
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . .
77
Item 13.
Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . . . . . . . . . . . . . . . . .
77
Item 14.
Principle Accountant Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80
i
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the “Annual Report”), and
in particular, Part II, 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 instead represent the
Company’s current assumptions and beliefs regarding future
events, many of which, by their nature, are inherently
uncertain and outside the Company’s control. 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
such as “anticipate,” “believe,” “estimate,”
“continue,”“intend,” “expect,” “plan,” “forecast,” “project”
and similar expressions, or future-tense or conditional
constructions such as “will,” “may,” “should,” “could” and
“would,” or the negative thereof or other variations thereon
or comparable terminology. The Company cautions that these
statements are merely predictions and are not to be considered
guarantees of
future performance. Forward-looking
statements are based upon current expectations and
assumptions that are subject to risks and uncertainties that can
cause actual results to differ materially from those projected,
anticipated or implied. A detailed discussion of potential risks
and uncertainties that could cause actual results and events to
differ materially from forward-looking statements include, but
are not limited to, those discussed in Part I, Item 1A – “Risk
Factors” of this Annual Report and periodically in future
reports filed with the Securities and Exchange Commission
(the “SEC”).
The Company has no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information or future events, except as required by law.
ii
PART I
Item 1. Business.
General
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global,
diversified, technology-driven company that develops and
supplies chemistry and services to the oil and gas 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 was originally incorporated in the Province of
British Columbia on May 17, 1985. In October 2001, the
Company moved the corporate domicile to Delaware and
effected a 120 to 1 reverse stock split by way of a reverse
merger with CESI Chemical, Inc. (“CESI”). Since then, the
Company has grown through a series of acquisitions and
organic growth.
In 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 Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, (the “Exchange Act”) are posted to the Company’s
soon as practicable
website, www.flotekind.com, as
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
During the fourth quarter of 2016, the Company initiated a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry. The Company is executing a plan to sell
or otherwise dispose of its Drilling Technologies and
Production Technologies segments. An investment banking
advisory services firm has been engaged and is actively
marketing these segments. Effective December 31, 2016, the
Company has classified the assets, liabilities, and results of
operations for
two segments as “Discontinued
Operations” for all periods presented.
these
In August 2016, the Company opened its new Global Research
& Innovation Center. This state-of-the-art research facility
fosters the development of next-generation innovative
chemistries and permits expanded collaboration between
clients, leaders from academia, and Company scientists. These
collaborative opportunities are important and will distinguish
the Company’s chemistry technologies and capability within
the industry.
1
In July 2016, the Company acquired 100% of the stock and
interests in International Polymerics, Inc. (“IPI”) and related
entities for $7.9 million in cash consideration, net of cash
acquired, and 247,764 shares of the Company’s common
stock. IPI is a U.S. based manufacturer of high viscosity guar
gum and guar slurry for the oil and gas industry with a wide
selection of stimulation chemicals.
In January 2015, the Company acquired 100% of the assets of
International Artificial Lift, LLC (“IAL”) for $1.3 million in
cash consideration and 60,024 shares of the Company’s
common stock. IAL specializes in the design, manufacturing
and service of next-generation hydraulic pumping units that
serve to increase and maximize production for oil and natural
gas wells. The assets, liabilities, and results of operations of
IAL are included in discontinued operations.
the Company acquired 100% of
In April 2014,
the
membership interests in SiteLark, LLC (“SiteLark”) for $0.4
million in cash consideration and 5,327 shares of the
Company’s common stock. SiteLark provides 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.
interest
In January 2014, the Company acquired 100% of the
membership
in Eclipse IOR Services, LLC
(“EOGA”), a leading Enhanced Oil Recovery (“EOR”) design
and injection firm. The Company paid $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.
Description of Operations and Segments
The Company’s continuing operations include two strategic
business segments: Energy Chemistry Technologies and
Consumer and Industrial Chemistry Technologies. The
Drilling Technologies and Production Technologies segments
are classified as discontinued operations.
The Company offers competitive products and services
derived from technological advances, some of which are
patented, that are responsive to industry demands in both
domestic and international markets. Flotek operates and/or
distributes its products in over 20 domestic and international
markets.
information about operating segments and
Financial
geographic concentration is provided in Note 19 – “Segment
and Geographic Information” in Part II, Item 8 – “Financial
Statements and Supplementary Data” of this Annual Report.
Information about the Company’s two continuing operating
segments is below.
Energy Chemistry Technologies
technical
The Energy Chemistry Technologies (“ECT”) segment
designs, develops, manufactures, packages, and markets
chemistries for use in oil and gas (“O&G”) well drilling,
cementing, completion, and stimulation activities designed to
maximize recovery in both new and mature fields. These
specialty chemistries possess enhanced performance
characteristics and are manufactured to withstand a broad
range of downhole pressures, temperatures and other well-
to be compliant with customer
specific conditions
specifications. This
services
segment has
laboratories and a research and innovation laboratory that
focus on design improvements, development and viability
testing of new chemistry formulations, and continued
enhancement of existing products. Chemistries 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® product mixtures are
environmentally friendly, stable mixtures of plant derived oils,
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,
improve 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. CnF® chemistries
help achieve improved operational and financial results for
the Company’s customers in low permeability sand and shale
reservoirs.
Consumer and Industrial Chemistry Technologies
The Consumer and Industrial Chemistry Technologies
(“CICT”) segment sources citrus oil domestically and
internationally and is one of the largest processors of citrus
oils in the world. Products produced from processed citrus oil
include (1) high value compounds used as additives by
companies in the flavors and fragrances markets and (2)
environmentally friendly chemistries 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 industries
and specialty chemical industry. These technologies are used
within food and beverage, fragrance, and household and
industrial cleaning products industries.
Discontinued Operations
Drilling Technologies. The Drilling Technologies segment,
reported as discontinued operations, provides downhole
drilling tools for use in energy and mining activities. This
segment assembles, rents, sells, inspects, and markets
specialized equipment used in energy, mining, and industrial
drilling activities. Established tool rental operations are
located throughout the United States (the “U.S.”) and in a
number of international markets.
Production Technologies. The Production Technologies
segment, reported as discontinued operations, provides
pumping system components, electric submersible pumps
(“ESPs”), gas
and
complementary services. Through the Company’s acquisition
of IAL, the Company provides a line of next generation
hydraulic pumping units that serve to increase and maximize
production for oil and natural gas wells.
separators, production valves,
Seasonality
Overall, operations are not significantly affected by
seasonality. Certain working capital components build and
recede throughout the year in conjunction with established
purchasing and selling cycles that can impact operations and
financial position. In particular, citrus oil inventories increase
during the first and second quarters in-line with the citrus crop
harvest and processing season. The performance of certain
services within each of the Company’s segments can be
susceptible
to both weather and naturally occurring
phenomena, including, but not limited to, the following:
•
•
•
•
the severity and duration 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; and
adverse weather and disease can affect citrus crops in
Florida and Brazil which can negatively impact the
availability of citrus oils for the CICT business unit.
Product Demand and Marketing
Demand for the Company’s energy chemistry products and
services is dependent on levels of conventional and non-
conventional oil and natural gas well drilling and completion
activity, both domestically and internationally. Products in
both the Energy Chemistry Technologies and Consumer and
Industrial Chemistry Technologies segments are marketed
directly to customers through the Company’s direct sales force
and
through certain contractual agency arrangements.
Established customer relationships provide repeat sales
opportunities within all segments. While the 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”), Asia-Pacific, and South
America. In addition to direct marketing and relationship
development, the Company also markets products and
services through the use of third party agents primarily in
international markets.
2
Customers
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 and commercial cleaning product companies,
fragrance and cosmetic companies, and food manufacturing
companies. In the two segments reported in continuing
operations, the Company had two major customers for the year
ended December 31, 2016, which accounted for 16% and 13%
of consolidated revenue, three major customers for the year
ended December 31, 2015, which accounted for 17%, 15%,
and 11% of consolidated revenue, and one major customer for
the year ended December 31, 2014, which accounted for 22%
of consolidated revenue. In aggregate, the Company’s largest
three customers collectively accounted for 36%, 43%, and
41% of consolidated
the years ended
revenue
December 31, 2016, 2015, and 2014, respectively.
for
Research and Innovation
The Company is engaged in research and innovation activities
focused on the design of reservoir specific, customized
chemistries in the Energy Chemistry Technologies segment
and improvement of flavor and fragrance additives in the
Consumer and Industrial Chemistry Technologies segment. In
these two segments, for the years ended December 31, 2016,
2015, and 2014, the Company incurred $9.3 million, $6.7
million, and $4.8 million, respectively, of research and
innovation expense. In 2016, research and innovation expense
was approximately 3.5% of consolidated revenue. The
Company expects that its 2017 research and innovation
investment will increase in response to growth of the business.
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
The Company’s policy is to protect its intellectual property,
both within and outside of the U.S. The Company considers
patent protection for all products and methods deemed to have
commercial significance and that may 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,
and manufacturing and operational expertise, are necessary
and appropriate to protect its intellectual property and ensure
continued strategic advantage. Within
its continuing
operations, the Company currently has 16 issued patents and
over six dozen pending patent applications filed in the U.S.
and abroad on various chemical compositions and methods,
and software methods. In addition, the Company currently
has 59 registered trademarks and over three dozen pending
trademark applications filed in the U.S. and abroad, covering
a variety of its goods and services.
Competition
The ability to compete in the oilfield services industry and the
consumer and industrial markets is dependent upon the
Company’s ability to differentiate its products and services,
provide superior quality and service, and maintain a
competitive cost structure with sufficient raw material
supplies. Activity levels in the oil field services industry are
impacted by current and expected oil and natural gas prices,
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 products and 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 citrus-based terpene (d-limonene) is a major feedstock for
many of the Company’s CnF® chemistries. In addition, the
Company utilizes naturally derived terpenes from other
sources and bio-based solvents from other natural sources
when it determines the efficacy of such formulas is
appropriate. The Company has the ability to purify these
alternative solvents to ensure they meet Flotek’s rigorous
environmental standards.
The Company’s Consumer and
Industrial Chemistry
Technologies segment faces competition from other citrus
processors, flavor companies, and other solvent sources. Other
terpenes and esters can provide an effective substitute to the
Company’s citrus-based
terpenes, although, without
refinement and enhanced formulations efforts, are generally
of lower quality. Such terpenes and esters can be cheaper than
citrus terpenes, but, as noted above, can contain unfavorable
characteristics and compounds that have varying degrees of
toxicity and performance
limitations. The Company’s
chemistries are intended to replace these undesirable qualities.
In addition, the segment’s flavor ingredients compete with
synthetic and bio-engineered substitutes that are cheaper than
natural flavors derived from citrus oils. These substitutes lack
complexity and impact of the Company’s natural flavors and
fragrances.
3
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 chemistries segments are available from
limited sources. Disruptions to suppliers could materially
impact sales. The prices paid for raw materials vary based on
energy, steel, citrus, guar, and other commodity price
fluctuations, tariffs, duties on imported materials, foreign
currency exchange rates, business cycle position, and global
demand. Higher prices for chemistries, steel, citrus, guar, and
other raw materials could adversely impact future sales and
contract fulfillments.
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. When able, the Company uses
multiple suppliers, both domestically and internationally, to
purchase raw materials on the open market.
Citrus greening disease has adversely affected the availability
of citrus crops around the world, thereby negatively impacting
the supply and increasing the price of citrus terpenes. The
Company’s market position, inventory, and forward purchases
helps ensure availability for its patented CnF® technologies,
as well as its existing customer base within CICT. As
mentioned previously, the Company has also developed new
CnF® formulations utilizing alternative solvents. These new
formulations not only diversify the Company’s dependence
on citrus terpenes, but they also provide certain performance
benefits necessary for specific customer and reservoir
challenges.
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. These laws and regulations strictly
govern the manufacture, storage, transportation, sale, use, and
disposal of chemistry products. The Company strives to ensure
full compliance with all regulatory requirements and is
unaware of any material instances of noncompliance.
The Company continually evaluates the environmental impact
of its operations and attempts to identify potential liabilities
and costs of any environmental remediation, litigation, or
associated claims. Several products of the Energy Chemistry
Technologies’ and Consumer and Industrial Chemistry
Technologies’ segments are considered hazardous materials.
In the event of a leak or spill in association with Company
operations, the Company could be exposed to risk of material
remediate any
cost, net of
insurance proceeds,
to
contamination. No environmental claims are currently being
litigated, and the Company does not expect that costs related
to remediation requirements will have a significant adverse
effect on the Company’s consolidated financial position or
results of operations.
Employees
At December 31, 2016, the Company had 363 employees in
its continuing operations and 154 employees
its
discontinued operations segments, exclusive of existing
worldwide agency relationships. None of the Company’s
employees are covered by a collective bargaining agreement
and labor relations are generally positive. Certain international
locations have staffing or work arrangements that are
contingent upon local work councils or other regulatory
approvals.
in
Available Information and Website
The Company’s website is accessible at www.flotekind.com.
Annual reports on Form 10-K, quarterly reports on Form 10-
Q, current reports on Form 8-K, and amendments to reports
filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act are available (see the “Investor Relations”
section of the Company’s website), as soon as reasonably
practicable, subsequent 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.
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 2016 Annual Chief Executive Officer Certification
required by the NYSE was submitted on May 4, 2016. 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 2017 Annual Meeting of Stockholders.
The Company has disclosed and will continue to disclose any
changes or amendments 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.
4
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 considered together with the other information
contained in this Report and the other reports and materials
filed by the Company with the SEC. Further, many of these
risks are interrelated and, as a result, the occurrence of certain
risks could trigger and/or exacerbate other risks. Such a
combination could materially increase the severity of the
impact of these risks on our business, results of operations,
financial condition, or liquidity.
This Annual Report contains “forward-looking statements,”
as defined in the Private Securities Litigation Reform Act of
1995, that involve risks and uncertainties. Forward-looking
statements discuss Company prospects, expected revenue,
expenses and profits, strategic and operational initiatives, and
other activities. Forward-looking statements also contain
suppositions regarding future oil and natural gas industry
conditions, as well as market conditions impacting the
consumer and industrial business, both domestically and
internationally. 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 the
beginning of this Annual Report.
Risks Related to the Company’s Business
The Company’s business is largely dependent upon domestic
and international oil and natural gas industry spending, as
well as consumer trends in the Company’s consumer and
industrial business. Spending could be adversely affected by
industry conditions, consumer trends or by new or increased
governmental regulations, global economic conditions, the
availability of credit, and lower oil and natural gas prices.
All of these factors are beyond the Company’s control. The
resulting reductions in customers’ expenditures could have
a significant adverse effect on Company revenue, margins,
and overall operating results.
The Company’s energy segment is dependent upon customers’
willingness to make operating and capital expenditures for
exploration, development and production of oil and natural
gas in both North American and global markets. Customers’
expectations of a decline in future oil and natural gas market
prices could result in curtailed spending, thereby reducing
demand for the Company’s products and services. Industry
conditions are influenced by numerous factors over which the
Company has no control, including the supply of and demand
for oil and natural gas, domestic and international economic
conditions, political instability in oil and natural gas producing
countries and merger and divestiture activity among oil and
natural gas producers and service companies.
5
The price for oil and natural gas is subject to a variety of
factors, including, but not limited to:
•
•
•
•
•
•
•
•
global demand for energy as a result of population
growth, economic development, and general economic
and business conditions;
the ability of the Organization of Petroleum Exporting
Countries (“OPEC”) to set and maintain production
levels and the impact of non-OPEC producers on global
supply;
availability and quantity of natural gas storage;
import and export volumes 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 advances impacting energy production
and consumption; and
• weather conditions.
The volatility of oil and natural gas prices and the
consequential effect on exploration and production activity
could adversely impact the activity levels of the Company’s
customers.
One indicator of drilling and production spending is drilling
activity as measured by 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 negatively affect the price of,
some of the Company’s products and services. Domestic
demand for oil and natural gas could also be uniquely affected
by public attitude regarding drilling in environmentally
sensitive areas, vehicle emissions and other environmental
standards, alternative fuels, taxation of oil and gas, perception
of “excess profits” of oil and gas companies, and anticipated
changes in governmental regulation and policy.
Volatile economic conditions could weaken customer
exploration and production expenditures, causing reduced
demand for the Company’s products and services and a
significant adverse effect on the Company’s operating results.
It is difficult to predict the pace of industry growth, the
direction of oil and natural gas prices, the direction and
magnitude of economic activity, and to what extent these
conditions could affect the Company. However, reduced cash
flow and capital availability could adversely impact the
financial condition of the Company’s customers, which could
result
in customer project modifications, delays or
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.
industrial business
The Company’s consumer and
is
dependent on consumer demand for environmentally
preferred solvents, as well as flavors and fragrances that are
based on the unique attributes of citrus oils. Synthetic and bio-
derived chemicals compete with the Company’s line of
naturally derived products and could affect future demand.
Furthermore, 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, adversely impacting the Company’s
results of operations and cash flows.
The Company’s inability to develop and/or introduce 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, as well as
adversely affecting the Company’s future success and
profitability.
The oil and natural gas 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 chemistries and their
function and performance. Consequently, the Company’s
future success is dependent, in part, upon the Company’s
continued ability to timely develop innovative products and
services. Increasingly sophisticated customer needs and the
ability to anticipate and respond to technological and
operational advances in the oil and natural gas industry is
critical. If the Company fails to successfully develop and
introduce innovative products and services that appeal to
customers, or if existing or new market competitors develop
superior products and services, the Company’s revenue and
profitability could deteriorate.
Consumer and industrial chemistry markets that purchase the
Company’s citrus-based products are largely influenced by
consumer preference and regulatory requirements. While
citrus-based beverage flavorings, retail cleaning products, and
fine fragrances perpetually rank high in consumer surveys, the
Company’s continued success
requires new product
innovation to keep pace with consumer trends and regulatory
issues. If the Company fails to provide innovative products
and services to its customers or to introduce performance
products that comply with new environmental regulations, the
Company’s financial performance could be impacted.
Increased competition could exert downward pressure on
prices charged for the Company’s products and services.
The Company operates in a competitive environment
characterized by large and small competitors. Competitors
with greater resources and lower cost structures or who are
trying to gain market share may be successful in providing
competing products and services to the Company’s customers
at lower prices than the Company currently charges. This may
require the Company to lower its prices, resulting in an adverse
impact on revenues, margins, and operating results.
6
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.
The Company relies on a combination of patents, trademarks,
copyrights, trade secrets, non-disclosure agreements, and
other security measures to establish and protect the Company’s
intellectual property rights. Although the Company believes
that existing measures are reasonably adequate to protect
intellectual property rights, there is no assurance that the
measures taken will prevent misappropriation of proprietary
information or dissuade others from independent development
of similar products or services. Moreover, there is no assurance
that the Company will be able to prevent competitors from
copying, reverse engineering, modifying, or otherwise
obtaining and/or using the Company’s technology and
proprietary rights to create competitive products or services.
The Company may not be able to enforce intellectual property
rights outside of the U.S. Additionally, the laws of certain
countries in which the Company’s products and services are
manufactured or marketed may not protect the Company’s
proprietary rights to the same extent as do the laws of the U.S.
Furthermore, other third parties may infringe, 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 and services are without
patent protection. The issuance of a patent does not guarantee
validity or enforceability. The Company’s patents may not
necessarily 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
services and utilizing the Company’s patented technology.
The Company is exposed and, in the future, may be exposed
to allegations of patent and other intellectual property
infringement from others. The Company may allege
infringement of its patents and other intellectual property
rights against others. Under either scenario, the Company
could become involved in costly litigation or other legal
proceedings regarding its patent or other intellectual property
rights, from both an enforcement and defensive standpoint.
Even if the Company chooses to enforce its patent or other
intellectual property rights against a third party, there may be
risk that the Company’s patent or other intellectual property
rights become invalidated or otherwise unenforceable through
legal proceedings. If intellectual property infringement claims
are asserted against the Company, the Company could defend
itself from such assertions or 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, third parties could file lawsuits or other legal
proceedings against
the Company, seeking damages
(including treble damages) or an injunction against the
manufacture, use, sale, offer for sale, or importation of the
Company’s products and services. These could result in the
Company having to discontinue the use, manufacture, and sale
of certain products and services, increase the cost of selling
certain products and services, or result in damage to the
Company’s reputation. An award of damages, including
material royalty payments, or the entry of an injunction order
against the use, manufacture, and sale of any of the Company’s
products and services found to be infringing, could have an
adverse effect on the Company’s results of operations and
ability to compete.
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.
The Company has critical customer relationships which are
dependent upon production and development activity related
to a handful of customers. In the two segments reported in
continuing operations, revenue derived from the Company’s
three largest customers as a percentage of consolidated
revenue for the years ended December 31, 2016, 2015, and
2014, totaled 36%, 43%, and 41%, respectively. Customer
relationships are historically governed by purchase orders or
other short-term contractual obligations as opposed to long-
term contracts. The loss of one or more key customers could
have an adverse effect on the Company’s results of operations
and could result in a decline in the Company’s revenue.
Loss of key suppliers, the inability to secure raw materials
on a timely basis, or the Company’s inability to pass
commodity price increases on to customers could have an
adverse effect on the Company’s ability to service customer’s
needs and could result in a loss of customers.
Materials used in servicing and manufacturing operations as
well as those purchased for sale are generally available on the
open market from multiple sources. Acquisition costs and
transportation of raw materials to Company facilities have
historically been impacted by extreme weather conditions.
Certain raw materials used by the Energy Chemistry
Technologies and the Consumer and Industrial Chemistry
Technologies segments are available only from limited
sources; accordingly, any disruptions to critical suppliers’
operations could adversely impact the Company’s operations.
Prices paid for raw materials could be affected by energy, steel
and other commodity prices; weather and disease associated
with
the Company’s crop dependent raw materials,
specifically citrus greening; tariffs and duties on imported
materials; foreign currency exchange rates; and phases of the
general business cycle and global demand. The Energy
Chemistry Technologies and the Consumer and Industrial
Chemistry Technologies segments secure short and long term
supply agreements for critical raw materials from both
domestic
international vendors. The Drilling
Technologies and Production Technologies segments,
reported as discontinued operations at December 31, 2016,
purchase critical raw materials on the open market and, where
able, from multiple suppliers, both domestically and
internationally.
and
7
The prices of key raw materials including citrus terpenes and
natural polymers (guar) are subject to market fluctuations
which at times can be significant and unpredictable. The
Company may be unable to pass along price increases to its
customers, which could result in an adverse impact on margins
and operating profits. The Company currently uses purchasing
strategies designed, where possible, to align the timing of
customer demand with supply commitments. However, the
Company currently does not hedge commodity prices, and
there is no guarantee that the Company’s purchasing strategies
will prevent cost increases from resulting in adverse impacts
on margins and operating profits.
If the Company loses the services of key members of
management, the Company may not be able to manage
operations and implement growth strategies.
The Company depends on the continued service of the Chief
Executive Officer and President, the Chief Financial Officer,
the Executive Vice President, Operations, the Executive Vice
President, Research and Development, and other key members
of the executive management team, who possess significant
expertise and knowledge of the Company’s business and
industry. Furthermore, the Chief Executive Officer and
President serves as Chairman of the Board of Directors. The
Company has entered into employment agreements with all
of these key members; however, at December 31, 2016, 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 could significantly
reduce the Company’s ability to manage operations effectively
and implement strategic business initiatives. On November 2,
2016, Robert M. Schmitz notified the Company of his decision
to retire as the Company’s Executive Vice President and Chief
Financial Officer effective in the first quarter of 2017. The
that appropriate
Company can provide no assurance
replacements for key positions could be found should the need
arise.
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 controls over
financial reporting, the Company may not be able to provide
reliable financial reports, which in turn could affect the
Company’s operating results or cause the Company to fail to
meet its reporting obligations. Ineffective internal controls
could also cause investors to lose confidence in reported
financial 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.
Network disruptions, security threats and activity related
to global cyber-crime pose risks to our key operational,
reporting and communication systems.
The Company relies on access to information systems for its
operations. Failures of or interference with access to these
systems, such as network communications disruptions, could
have an adverse effect on our ability to conduct operations or
directly impact consolidated reporting. Security breaches pose
a risk to confidential data and intellectual property, which
could result in damages to our competitiveness and 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.
The Company may pursue strategic acquisitions, joint
ventures, and strategic divestitures, which could have an
adverse impact on the Company’s business.
The Company’s past and potential future acquisitions, joint
ventures, and divestitures involve risks that could adversely
affect the Company’s business. Negotiations of potential
acquisitions, joint ventures, or other strategic relationships,
integration of newly acquired businesses, and/or sales of
existing businesses could be time consuming and divert
management’s attention from other business concerns.
Acquisitions and joint ventures could also expose the
Company to unforeseen liabilities or risks associated with new
markets or businesses. Unforeseen operational difficulties
related to acquisitions and joint ventures could result in
a
diminished
disproportionate amount of the Company’s management’s
attention and resources. Additionally, acquisitions could result
in the commitment of capital resources without the realization
of anticipated returns. Divestitures could result in the loss of
future earnings without adequate compensation and the loss
of unrealized strategic opportunities.
performance
financial
require
or
If the Company does not manage the potential difficulties
associated with expansion successfully, the Company’s
operating results could be adversely affected.
The Company has grown over the last several years through
internal growth, strategic alliances, and strategic business and
asset acquisitions. The Company believes future success will
depend, in part, on the Company’s ability to adapt to market
opportunities and changes, to successfully integrate the
operations of any businesses acquired, expansion of existing
product and service lines, and potentially expand into new
product and service areas in which the Company may not have
prior experience. Factors that could result in strategic business
difficulties include, but are not limited to:
8
•
•
•
•
•
•
•
failure to effectively integrate acquisitions, joint
ventures or strategic alliances;
failure to effectively plan for risks associated with
expansion into areas in which management lacks
prior experience;
lack of experienced management personnel;
increased administrative burdens;
lack of customer retention;
technological obsolescence; and
infrastructure, technological, communication and
logistical problems associated with
large,
expansive operations.
If the Company fails to manage potential difficulties
successfully, the Company’s operating results could be
adversely impacted.
We may be exposed to liabilities or losses from operations
that we have or will discontinue or otherwise sell, including
our Drilling Technologies and Production Technologies
segments.
these
During the fourth quarter of 2016, the Company initiated a
strategic restructuring under which the Company plans to sell
or otherwise dispose its Drilling Technologies and Production
Technologies segments. Effective December 31, 2016, the
Company has classified the assets, liabilities, and results of
operations for
two segments as “Discontinued
Operations” for all periods presented. We intend to sell as a
going-concern or otherwise dispose of the two segments by
the end of 2017; however, we cannot assure that we will
complete a transaction under terms favorable to the Company,
or even at all. Similarly, we may incur unanticipated additional
costs in connection with the sale or disposition of the Drilling
Technologies and Production Technologies segments. If we
are not able to sell or dispose of the two segments on terms
favorable to the Company, our business, prospects, financial
condition or operating results could be harmed.
The Company’s ability to grow and compete could be
adversely affected if adequate capital is not available.
The ability of the Company to grow and be competitive in the
market place is dependent on the availability of adequate
capital. Access to capital is dependent, in large part, on the
Company’s cash flows and the availability of and access to
equity and debt financing. The Company’s term and revolving
loan agreements require approval and place limits on certain
capital transactions and various business acquisitions and
combinations. The Company cannot guarantee that cash flows
will be sufficient, or that the Company will continue to be able
to obtain equity or debt financing on acceptable terms, or at
all. As a result, the Company may not be able to finance
take advantage of business
strategic growth plans,
opportunities, or to respond to competitive pressures.
The Company’s revolving credit facility and term loan have
variable interest rates that could increase.
At December 31, 2016, the Company had a $55.2 million
revolving credit facility commitment subject to collateral
availability limits. 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
1.5% to 2.0% or (b) between the London Interbank Offered
Rate (LIBOR) plus 2.5% to 3.0%. The Company is required
to pay a monthly facility fee of 0.25% per annum, on any
unused amount under the commitment based on daily
averages. The current credit facility remains in effect until
May 10, 2020.
The amount the Company borrowed under a term loan was
reset to $10.0 million effective as of September 30, 2016. The
interest rate on the term loan varies based on the fixed charge
coverage ratio. Rates range (a) between PNC Bank’s base
lending rate plus 2.25% to 2.75% or (b) between the London
Interbank Lending Rate (LIBOR) plus 3.25% to 3.75%.
There can be no assurance that the revolving credit facility
and the term loan will not experience significant interest rate
increases.
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.
from
The Company performs credit analysis on potential
customers; however, credit analysis does not provide full
assurance that customers will be willing and/or able to pay for
the Company.
goods and services purchased
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. Because 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 results, liquidity and cash flows.
Unforeseen contingencies such as litigation could adversely
affect the Company’s financial condition.
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
substances, patent
to hazardous
products, exposure
infringement, employment matters, commercial disputes, and
shareholder lawsuits. The defense of these lawsuits may
require significant expenses, divert 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.
The Company’s current insurance policies may not
adequately protect the Company’s business from all potential
risks.
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,
equipment and the environment, as well as suspension of
customers’ oil and gas operations. These events could result
in damages requiring costly repairs, the interruption of
Company business, including the loss of revenue and profits,
and/or 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 services industry to mitigate liabilities associated
with these potential hazards. The Company does not have
insurance against all foreseeable risks. Consequently, losses
and liabilities arising from uninsured or underinsured events
could have an adverse effect on the Company’s business,
financial condition, and results of operations.
Regulatory pressures, environmental activism, and
legislation could result in reduced demand for the
Company’s products and services, increase the Company’s
costs, and adversely affect the Company’s business, financial
condition, and results of operations.
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 preferred VOC, increased
consumer activism against hydraulic fracturing or other
regulatory or legislative actions by governments could
potentially result in materially reduced demand for the
Company’s products and services and could adversely affect
the Company’s business, financial condition, and results of
operations.
The Company is subject to complex foreign, federal, state
and local environmental, health and safety laws and
regulations, which expose the Company to liabilities that
could adversely affect the Company’s business, financial
condition, and results of operations.
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 Company’s
operations expose the Company to risks of environmental
liability that could result in fines, penalties, remediation,
property damage, and personal injury liability. In order to
remain compliant with laws and regulations, the Company
maintains permits, authorizations and certificates as required
9
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.
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.
certain non-proprietary
Material levels of 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 to publicly
disclose
information. These
regulations could require the reporting and public disclosure
of the Company’s proprietary chemistry formulas. The
adoption of any future federal or state laws or local
requirements, or the implementation of regulations imposing
reporting obligations on, or otherwise limiting, the hydraulic
fracturing process, could increase the difficulty of oil and
natural gas well production activity and could have an adverse
effect on the Company’s future results of operations.
Regulation of greenhouse gases and/or climate change
could have a negative impact on the Company’s business.
Certain scientific studies have suggested that emissions of
certain gases, commonly referred to as “greenhouse gases,”
which include carbon dioxide, methane, and other volatile
organic compounds, 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 attracting increasing worldwide attention.
For example, the Paris Agreement was signed in 2016, which
sets forth a global framework to address climate change.
Legislation and regulatory initiatives at the regional, state, and
local level have been considered and in some cases adopted
in an effort to reduce greenhouse gases. Some states have
individually or in regional cooperation imposed restrictions
on greenhouse gas emissions under various policies and
approaches, including establishing a cap on emissions,
requiring efficiency measures, or providing incentives for
pollution reduction, use of renewable energy sources, or use
of replacement fuels with lower carbon content. In addition,
the Environmental Protection Agency, the Bureau of Land
Management, and some states have issued regulations that
impose certain standards in an effort to limit greenhouse gas
emissions from oil and gas exploration and production
operations.
Existing or future laws, regulations, treaties, or international
agreements related to greenhouse gases, climate change, and
indoor air quality, including energy conservation or alternative
energy incentives, could have a negative impact on the
Company’s operations, if regulations resulted in a reduction
in worldwide demand for oil, natural gas, and citrus oils. Other
results could be increased compliance costs and additional
operating restrictions, each of which could have a negative
impact on the Company’s operations.
Changes in regulatory compliance obligations of critical
suppliers may adversely impact our operations.
The Dodd-Frank Wall Street Reform and Consumer Protection
Act (“Dodd-Frank Act”), signed into law on July 21, 2010,
includes Section 1502, which required 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, or
contracted to be manufactured, by an SEC-reporting company.
The metals covered by these rules include tin, tantalum,
tungsten and gold. The Company and Company suppliers use
some of these materials in their production processes.
In 2014, the Company established management systems and
processes and completed due diligence in compliance with the
requirements of Section 1502. Future requirements for
conducting Conflict 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 in higher costs for those raw
materials.
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. has been steadily increasing. The Company and its
customers are subject to risks inherent in doing business
outside of the U.S., including, but not limited to:
governmental instability;
corruption;
•
•
10
• war and other international conflicts;
Risks Related to the Company’s Industries
•
•
•
•
•
•
civil and labor disturbances;
requirements of local ownership;
cartel behavior;
partial or total expropriation or nationalization;
currency devaluation; and
foreign laws and policies, each of which can limit the
movement of assets or funds or result in the deprivation
of contractual rights or appropriation of property without
fair compensation.
Collections and recovery of rental 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 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
increased risk as the Company’s international business
portfolio grows. Further, the U.S. 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 not materially
impact the Company’s ability to conduct international
business.
The Company’s tax returns are subject to audit by tax
authorities. Taxing authorities may make claims for back
taxes, interest, and penalties.
The Company is subject to income, property, excise,
employment, and other taxes in the U.S. and a variety of other
jurisdictions around the world. Tax rules and regulations in
the U.S. and around the world are complex and subject to
interpretation. From time to time, taxing authorities conduct
audits of the Company’s tax filings and may make claims for
increased taxes and, in some cases, assess interest and
penalties. The assessments for back taxes, interest, and
penalties could be significant. If the Company is unsuccessful
in contesting these claims, the resulting payments could result
in a drain on the Company’s capital resources and liquidity.
11
General economic declines (recessions), limits to credit
availability, and industry specific factors could have an
adverse effect on energy industry activity, demand for flavor
and fragrance products, and the Company’s citrus based
solvents resulting in lower demand for the Company’s
products and services.
Worldwide economic uncertainty can reduce the availability
of liquidity and credit markets to fund the continuation and
expansion of industrial business 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 or
other regions of the world may also impact demand for the
Company’s products and services both domestically and
internationally.
Demand for the Company’s energy segments’ 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 energy
products and services is particularly sensitive to levels of
exploration, development, and production activity of, and the
corresponding capital spending by, oil and natural gas
companies, including national oil companies. One indication
of drilling and production activity and spending is rig count,
which the Company monitors to gauge market conditions. Any
prolonged reduction in oil and natural gas prices or drop in rig
count could depress current
levels of exploration,
development, and production activity. Perceptions of longer-
term lower oil and natural gas prices by oil and natural gas
companies could similarly reduce or defer major expenditures
given the long-term nature of many large-scale development
projects. Lower levels of activity could result in a
corresponding decline in the demand for the Company’s oil
and natural gas well products and services, which could have
a material adverse effect on the Company’s revenue and
profitability.
if
affected
economic
The Company’s consumer and industrial customers would be
adversely
activity decreased
dramatically. One of the Company’s primary products, d-
limonene, is often used to replace less desirable solvents in
numerous consumer and industrial applications and is often
more expensive than other materials. As economic activity
decreases, consumer and industrial companies not only
consume less solvent, they also may relax their environmental
preferences and purchase cheaper solvents. Demand for the
Company’s flavor and fragrance ingredients could be
negatively impacted as a result of a decline in demand for
consumer based products containing these ingredients. The
Company’s revenue and profitability could be negatively
impacted if demand for these products softens because of weak
economic activity. Furthermore, the segment is a critical
supplier of unique flavor and fragrance additives from citrus
for use
fragrances.
Reformulations away from natural citrus ingredients by these
retail beverages and
in major
major retail branded products would adversely affect the
segment.
Events in global credit markets can significantly impact the
availability of credit and associated financing costs for many
of the Company’s customers. Many of the Company’s
customers finance their drilling and production programs
through third-party lenders or public debt offerings. Lack of
available credit or increased costs of borrowing could cause
customers to reduce spending on drilling programs, thereby
reducing demand and potentially resulting in lower prices for
the Company’s products and services. Also, the credit and
economic environment could significantly
the
financial condition of some customers over a prolonged
period, leading to business disruptions and restricted ability
to pay for the Company’s products and services. The
Company’s forward-looking statements assume that the
Company’s lenders, insurers, and other financial institutions
will be able to fulfill their obligations under various credit
agreements, insurance policies, and contracts. If any of the
Company’s significant lenders, insurers and others are unable
to perform under such agreements, and if the Company was
unable to find suitable replacements at a reasonable cost, the
Company’s results of operations, liquidity, and cash flows
could be adversely impacted.
impact
A continuing period of depressed oil and natural gas prices
could result in further reductions in demand for the
Company’s products and services and adversely affect the
Company’s business, financial condition, and results of
operations.
The markets for oil and natural gas have historically been
volatile. Such volatility in oil and natural gas prices, or the
perception by the Company’s customers of unpredictability in
oil and natural gas prices, could adversely affect spending.
The oil and natural gas markets may be volatile in the future.
The demand for the Company’s products and services is, in
large part, driven by general levels of exploration and
production spending and drilling activity by its customers.
Continued weakness in oil and natural gas prices has caused
a decline in exploration and drilling activities, as compared to
prior peak periods, and a continuing weakness in oil and gas
prices or further decreases could cause further declines in
exploration and production activities. This, in turn, could
result in lower demand in the future for the Company’s
products and services and could result in lower prices for the
Company’s products and services. Further declines in oil or
natural gas prices could adversely affect the Company’s
business, financial condition, and results of operations.
New and existing competitors within the Company’s
industries could have an adverse effect on results of
operations.
The oil and natural gas industry is highly competitive. The
Company’s principal competitors include numerous small
companies capable of competing effectively in the Company’s
markets on a local basis, as well as a number of large
companies that possess substantially greater financial and
other resources than does 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 of new
competitors including current suppliers that decide to sell their
products and services directly to the Company’s customers.
As a result of this competition, 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.
The Company’s industry has a high rate of employee
turnover. Difficulty attracting or retaining personnel or
agents could adversely affect the Company’s business.
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, the demanding
nature of the work, and the need for industry specific
knowledge and technical skills, current employees could
choose to pursue employment opportunities outside the
Company that offer a more desirable work environment and/
or higher compensation than is offered by the Company. As a
result of these competitive labor conditions, the Company may
not be able to find qualified labor, which could limit the
Company’s growth. In addition, the cost of attracting and
retaining qualified personnel has increased over the past
several years due to competitive pressures. 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.
Severe weather could have an adverse impact on the
Company’s business.
to equipment 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
in
transportation of products and materials, and loss of
productivity. If 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
facilities,
A terrorist attack or armed conflict could harm the
Company’s business.
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
12
from payors, or disruptions of fuel supplies and markets if
pipelines, production 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
results of operations, impair the ability to raise capital, or
otherwise adversely impact the Company’s ability to realize
certain business strategies.
Risks Related to the Company’s Securities
The market price of the Company’s common stock has been
and may continue to be volatile.
The market price of the Company’s common stock has
historically been subject to significant fluctuations. The
following factors, among others, could cause the price of the
Company’s common stock to fluctuate significantly due to:
•
•
•
•
•
•
•
•
variations in the Company’s quarterly results of
operations;
changes in market valuations of companies in the
Company’s industry;
fluctuations in stock market prices and volume;
fluctuations in oil and natural gas prices;
issuances of common stock or other securities in the
future;
additions or departures of key personnel;
announcements by the Company or the Company’s
competitors of new business, acquisitions, or joint
ventures; and
negative statements made by external parties, about the
Company’s business, in public forums.
The stock market has experienced significant price and
volume fluctuations in recent years that have affected the price
of common stock of companies within many industries
including the oil and natural gas industry. 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 of value for the
shareholders. This could be 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 for the Company’s common stock
13
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.
The Company has no plans to pay dividends on the
Company’s common stock, and, therefore, investors will
have to look to stock appreciation for return on investments.
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, financial condition, capital
requirements, level of indebtedness, statutory and contractual
restrictions applying to the payment of dividends, and other
considerations deemed relevant by the board of directors.
Additionally, the Company’s current credit facility restricts
the payment of dividends without the prior written consent of
the lenders. Investors must rely on sales of common stock held
after price appreciation, which may never occur, in order to
realize a return on their investment.
Certain anti-takeover provisions of the Company’s charter
documents and applicable Delaware law could discourage
or prevent others from acquiring the Company, which may
adversely affect the market price of the Company’s common
stock.
The Company’s certificate of incorporation and bylaws
contain provisions that:
•
•
•
•
•
permit the Company to issue, without stockholder
approval, up to 100,000 shares of preferred stock, in
one or more series and, with respect to each series,
to fix the designation, powers, preferences and rights
of the shares of the series;
prohibit stockholders from calling special meetings;
limit the ability of stockholders to act by written
consent;
prohibit cumulative voting; and
require advance notice for stockholder proposals and
nominations for election to the board of directors to
be acted upon at meetings of stockholders.
In addition, Section 203 of the Delaware General Corporation
Law limits business combinations with owners of more than
15% of the Company’s stock without the approval of the board
of directors. Aforementioned provisions and other similar
provisions make it more difficult for a third party to acquire
the Company exclusive of negotiation. The Company’s board
of directors could choose not to negotiate with an acquirer
deemed not beneficial to or synergistic with the Company’s
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.
Future issuance of additional shares of common stock could
cause dilution of ownership interests and adversely affect
the Company’s stock price.
The Company is currently authorized to issue up to 80,000,000
shares of common stock. 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. Additional shares are
subject to issuance through various equity compensation plans
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
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.
to use net operating
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 future taxable income. In general, an
ownership change occurs if the aggregate stock ownership of
certain stockholders increases by more than 50 percentage
points over such stockholders’ lowest percentage ownership
during the testing period (generally three years). An ownership
change could limit the Company’s ability to utilize existing
NOLs and tax attribute 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, within the testing period could result in an
“ownership change.” Limitations imposed on the ability to use
NOLs and tax credits to offset future taxable income could
require the Company to pay U.S. federal income taxes in
excess of that which would otherwise be required if such
limitations were not in effect. Net operating losses and tax
attributes could expire unused, in each instance reducing or
eliminating the benefit of the NOLs and tax attributes. Similar
rules and limitations may apply for state income tax purposes.
Disclaimer of Obligation to Update
Except as required by applicable law or regulation, the
Company assumes no obligation (and specifically disclaims
any such obligation) to update these risk factors or any other
forward-looking statement contained in this Annual Report to
reflect actual results, changes in assumptions or other factors
affecting such forward-looking statements.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
At December 31, 2016,
the Company operated 32
manufacturing, warehouse, and research facilities in 12 U.S.
states and one research facility in Calgary, Alberta. The
Company owns 16 of these facilities and the remainder are
leased with lease terms that expire from 2017 through 2031.
In addition, the Company’s corporate office is a leased facility
located in Houston, Texas. The following table sets forth
facility locations:
14
Owned/
Leased
Location
Segment
Owned/
Leased
Location
Segment
Energy Chemistry
Technologies
Discontinued Operations
Drilling
Technologies
Owned Midland, Texas
Owned Oklahoma City, Oklahoma
Owned Robstown, Texas
Owned Vernal, Utah
Leased Bossier City, Louisiana
Leased Grand Prairie, Texas
Leased New Iberia, Louisiana
Leased Odessa, Texas
Leased Pittsburgh, Pennsylvania
Leased Wysox, Pennsylvania
Owned Dickinson, North Dakota
Owned Gillette, Wyoming
Owned Vernal, Utah
Leased Boyd, Texas
Leased Denver, Colorado
Leased Farmington, New Mexico
Production
Technologies
The Company considers owned and leased facilities to be in
good condition and suitable for the conduct of business.
directors. The lawsuits allege violations of law, breaches of
fiduciary duty, and unjust enrichment against the defendants.
The Company believes the class action lawsuit and the
derivative lawsuits are without merit, and it intends to
vigorously defend against all claims asserted. Discovery has
not yet commenced. At this time, the Company is unable to
reasonably estimate the outcome of this litigation.
In addition, the U.S. Securities and Exchange Commission has
opened an inquiry related to similar issues to those raised in
the above-described litigation.
Other 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.
Owned Carthage, Texas
Owned Dalton, Georgia
Owned Healdton, Oklahoma
Owned Marlow, Oklahoma
Owned Monahans, Texas
Owned Waller, Texas
Leased Calgary, Alberta
Leased Houston, Texas
Leased Hurst, Texas
Leased Natoma, Kansas
Leased Plano, Texas
Leased Raceland, Louisiana
Leased The Woodlands, Texas
Consumer and
Industrial
Chemistry
Technologies
Discontinued Operations
Owned Winter Haven, Florida
Drilling
Technologies
Owned Evanston, Wyoming
Owned Houston, Texas
Item 3. Legal Proceedings.
Class Action Litigation
In November 2015, four putative securities class action
lawsuits were filed in the United States District Court for the
Southern District of Texas against the Company and certain
of its officers. The lawsuits have been consolidated into a
single case, and an amended complaint has been filed. The
amended complaint asserts that the Company made false and/
or misleading statements, as well as failed to disclose material
adverse facts about the Company’s business, operations, and
prospects. The complaint seeks an award of damages in an
unspecified amount on behalf of a putative class consisting of
persons who purchased the Company’s common stock
between October 23, 2014 and November 9, 2015, inclusive.
In January 2016, three derivative lawsuits were filed, two in
the District Court of Harris County, Texas (which have since
been consolidated into one case), and one in the United States
District Court for the Southern District of Texas, on behalf of
the Company against certain of its officers and its current
Item 4. Mine Safety Disclosures.
Not applicable.
15
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.
PART II
The Company’s common stock began trading on the NYSE
on December 27, 2007 under the stock ticker symbol “FTK.”
As of the close of business on January 31, 2017, there were
57,008,597 shares of common stock outstanding held by
approximately 12,800 holders of record. The Company’s
closing sale price of the common stock on the NYSE on
January 31, 2017 was $10.57. 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 its 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.
Fiscal quarter ended:
March 31,
June 30,
September 30,
December 31,
High
$11.11
$13.82
$16.60
$14.84
2016
2015
Low
$5.52
$6.73
$12.88
$8.96
High
$18.76
$18.87
$20.70
$20.98
Low
$14.35
$11.27
$11.62
$8.72
16
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,
2011 through December 31, 2016. The performance graph
assumes $100 invested on December 31, 2011 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, 2011
$220
$200
$180
$160
$140
$120
$100
$80
$60
2011
2012
2013
2014
2015
2016
Flotek Industries, Inc.
Russell 2000 Index
Philadelphia Oil Service Index (OSX)
2011
2012
2013
2014
2015
2016
December 31,
Flotek Industries, Inc.
Russell 2000 Index
Philadelphia Oil Service Index (OSX)
$
$
$
100
100
100
$
$
$
122
115
102
$
$
$
202
157
130
$
$
$
188
163
97
$
$
$
115
153
73
$
$
$
94
183
85
17
Securities Authorized for Issuance Under Equity Compensation Plans
Equity compensation plan information relating to equity securities authorized for issuance under individual compensation
agreements at December 31, 2016 is as follows:
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights(1)
Weighted-
Average Exercise
Price of Outstanding
Options, Warrants
and Rights(2)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column(a))
(a)
(b)
(c)
2,114,923
$
— $
$
2,114,923
8.87
—
8.87
1,787,860
—
1,787,860
(1) Includes shares for outstanding stock options (663,288 shares), restricted stock awards (683,242 shares), and restricted stock unit share equivalents
(768,393 shares).
(2) The weighted-average exercise price is for outstanding stock options only and does not include outstanding restricted stock awards or restricted stock unit
share equivalents that have no exercise price.
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, 2016, the Company
has repurchased $20.1 million of its common stock under this repurchase program and $4.9 million may yet be used to purchase
shares.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50.0 million of the Company’s
common stock. Repurchases may be made in open market or privately negotiated transactions. Through December 31, 2016, the
Company has not repurchased any of its common stock under this authorization and $50.0 million may yet be used to purchase
shares.
Repurchases of the Company’s equity securities during the three months ended December 31, 2016 are as follows:
Total
Number
of Shares
Purchased (1)
1,078
$
— $
$
$
147,009
148,087
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 (2)
14.54
—
9.57
9.61
— $
— $
— $
—
54,907,862
54,907,862
54,907,862
October 1 to October 31, 2016
November 1 to November 30, 2016
December 1 to December 31, 2016
Total
(1) The Company purchases 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 on the open market.
(2) A covenant under the Company’s Credit Facility limits the amount that may be used to repurchase the Company’s common stock. At December 31, 2016, this
covenant limits additional share repurchases to $4.9 million.
18
Item 6. Selected Financial Data.
The following table sets forth certain selected historical
financial data and should be read in conjunction with Part II,
Item 7 – “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Part II, Item 8 –
“Financial Statements and Supplementary Data” of this
Annual Report. The selected operating and financial position
data as of and for each of the five years presented has been
derived from audited consolidated Company financial
statements, some of which appear elsewhere in this Annual
Report. Financial data has been adjusted for discontinued
operations, as indicated.
During the fourth quarter of 2016, the Company initiated a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry. The Drilling Technologies and
Production Technologies segments will be sold or otherwise
disposed of and have been classified as “Discontinued
Operations” for all periods presented because of this strategic
shift in operations and the major effect it will have on
operations and financial results.
During 2016 and 2015, the Company made one small
acquisition each year, and in 2014, the Company made two
small acquisitions. Insignificant non-recurring charges were
incurred related to these acquisitions. The net income and non-
recurring charges related to these acquisitions do not
materially affect comparability.
Impairments recognized in 2016 and 2015 relate to the Drilling
Technologies and Production Technologies segments and,
therefore, are included in discontinued operations.
During 2013, the Company acquired Florida Chemical
Company, Inc. for purchase consideration of $106.4 million.
During 2012, the Company recorded a reduction in the
valuation allowance for deferred tax assets of $16.5 million
and incurred losses on the extinguishment of debt of $7.3
million. Additionally, during 2012, the Company recorded
$2.6 million of income for the change in the fair value of its
warrant liability.
2016
As of and for the year ended December 31,
2014
(in thousands, except per share data)
2013
2015
2012
Operating Data
Revenue (1)
Income (loss) from operations (1)
$ 262,832
(7,304)
$ 269,966
12,278
$ 319,852
58,619
$ 243,860
37,360
$ 183,962
32,945
Income from continuing operations (1)
Income (loss) from discontinued operations, net of tax
Net (loss) income
$
$
1,907
(51,037)
7,158
(20,620)
$
$ (49,130) $ (13,462) $
39,622
13,981
53,603
(1) Amounts exclude impact of discontinued operations.
Per Share Data
Basic earnings (loss) per share:
Continuing operations
Discontinued operations, net of tax
Basic earnings (loss) per share
Diluted earnings (loss) per share:
Continuing operations
Discontinued operations, net of tax
Diluted earnings (loss) per share
$
$
$
$
$
0.03
(0.91)
(0.88) $
$
0.03
(0.91)
(0.88) $
$
0.13
(0.38)
(0.25) $
$
0.13
(0.37)
(0.24) $
0.73
0.26
0.99
0.71
0.25
0.96
$
$
$
$
$
$
22,376
13,802
36,178
0.44
0.27
0.71
0.42
0.26
0.68
$
$
$
$
$
$
14,114
35,677
49,791
0.29
0.74
1.03
0.28
0.70
0.98
Financial Position Data
Total assets
Convertible senior notes, long-term debt, and capital
lease obligations, less discount and current portion
Stockholders’ equity
$ 386,588
$ 403,090
$ 423,276
$ 375,581
$ 219,867
7,833
287,343
18,255
293,651
25,398
306,003
35,690
249,752
22,455
154,730
19
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 forward-looking statements, which are
subject to risks and uncertainties. Should one or more of these
risks or uncertainties materialize, actual results could differ
from those expressed or implied by the forward-looking
statements. See “Forward-Looking Statements” at
the
beginning of this Annual Report.
Flotek operates in over 20 domestic and international markets.
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.
Basis of Presentation
Continuing Operations
During the fourth quarter of 2016, the Company classified the
Drilling Technologies and Production Technologies segments
as held for sale based on management’s intention to sell these
businesses. The Company’s historical financial statements
have been revised to present the operating results of the
Drilling Technologies and Production Technologies segments
as discontinued operations. The results of operations of
Drilling Technologies and Production Technologies are
presented as “Loss from discontinued operations” in the
statement of operations and the related cash flows of these
segments has been reclassified to discontinued operations for
all periods presented. The assets and liabilities of the Drilling
Technologies and Production Technologies segments have
been reclassified to “Assets held for sale” and “Liabilities held
for sale”, respectively, in the consolidated balance sheets for
all periods presented.
Results of operations of the Drilling Technologies and
Production Technologies segments for the years ended
December 31, 2016, 2015, and 2014 are discussed below.
Executive Summary
Flotek is a global, diversified, technology-driven company
that develops and supplies chemistry and services to the oil
and gas 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.
includes specialty
The Company’s oilfield business
chemistries and logistics. Flotek’s technologies enable its
customers in pursuing improved efficiencies in the drilling and
completion of their wells. 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 citrus oil in the world. Products produced from
processed citrus oil include (1) high value compounds used as
additives by companies in the flavors and fragrances markets
and (2) environmentally friendly chemistries for use in
numerous industries around the world, including the oil and
gas (“O&G”) industry.
The operations of the Company are categorized into two
reportable segments: Energy Chemistry Technologies and
Consumer and Industrial Chemistry Technologies.
• Energy Chemistry Technologies designs, develops,
manufactures, packages, and markets specialty
chemistries used in O&G well drilling, cementing,
completion, and stimulation. These
technologies
developed by Flotek’s Research and Innovation team
enable customers to pursue improved efficiencies in the
drilling and completion of wells.
• Consumer and Industrial Chemistry Technologies
designs, develops, and manufactures products that are
sold to companies in the flavor and fragrance industries
and specialty chemical industry. These technologies are
used by beverage and food companies, fragrance
companies, and companies providing household and
industrial cleaning products.
Discontinued Operations
The Drilling Technologies and Production Technologies
segments are classified as discontinued operations.
•
• Drilling Technologies assembles, rents, sells, inspects,
and markets downhole drilling equipment used in
energy, mining, and industrial drilling activities.
Production Technologies assembles and markets
production-related equipment, including pumping
system components, electric submersible pumps
(“ESP”), gas separators, valves, and services that
support natural gas and oil production activities.
Market Conditions
The Company’s success is sensitive to a number of factors,
which include, but are not limited to, drilling and well
completion activity, customer demand for its advanced
technology products, market prices for raw materials, and
governmental actions.
Drilling and well completion activity levels are influenced by
a number of factors, including the number of rigs in operation
and the geographical areas of rig activity. Additional factors
20
that influence the level of drilling and well completion activity
include:
• Chemistries that are economically viable, socially
responsible, and ecologically sound.
• 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 and completion
methods and economics.
Historical North American drilling activity is reflected in
“TABLE A” on the following page.
Customers’ demand for advanced technology products and
services provided by the Company are dependent on their
recognition of the value of:
• Chemistries that improve the economics of their
O&G operations,
• Chemistries that meet the need of consumer product
markets, and
Market prices for commodities, including citrus oils and guar,
can be influenced by:
• Historical, current, and anticipated future production
levels of the global citrus (primarily orange) and guar
crop,
• Weather related risks,
• Health and condition of citrus trees and guar plants
•
(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
chemistries, including, but not limited to, the following
industrial applications:
• O&G drilling and completion operations,
• O&G production operations, and
• Non-O&G industrial solvents.
TABLE A
Average North American Active Drilling Rigs
United States
Canada
Total
Average U.S. Active Drilling Rigs by Type
Vertical
Horizontal
Directional
Total
Average North American Drilling Rigs by Product
Oil
Natural Gas
Total
2016
2015
2014
2016 vs. 2015
% Change
2015 vs. 2014
% Change
509
130
639
60
400
49
509
471
168
639
978
192
1,170
139
744
95
978
835
335
1,170
1,862
379
2,241
376
1,275
211
1,862
1,745
496
2,241
(48.0)%
(32.3)%
(45.4)%
(56.8)%
(46.2)%
(48.4)%
(48.0)%
(43.6)%
(49.9)%
(45.4)%
(47.5)%
(49.3)%
(47.8)%
(63.0)%
(41.6)%
(55.0)%
(47.5)%
(52.1)%
(32.5)%
(47.8)%
Source: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); Rig counts are the annual average of the reported weekly rig count activity.
21
Total US Rig Count
Total Canadian Rig Count
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
4 8
2
1
6
1
0
2
4
2
8
2
2
3
6
3
0
4
4
4
8
4
2
5
500
400
300
200
100
0
4 8
2
1
6
1
0
2
4
2
8
2
2
3
6
3
0
4
4
4
8
4
2
5
Rig Count Week
Rig Count Week
2015
2016
2015
2016
During the year ended 2016, North American drilling activity
saw a significant decline compared to 2015 and 2014, but
started to recover during the second half of the year. Total
average North American active drilling rig count in 2016
decreased by 45.4% from 2015 and 47.8% from 2014 to 2015.
Average North American oil drilling rig activity decreased by
43.6% in 2016 compared to 2015, and 52.1% from 2014 to
2015. Average North American natural gas drilling rig count
decreased by 49.9% in 2016 compared to 2015, and 32.5%
from 2014 to 2015.
Average U.S. rig activity decreased by 48.0% in 2016
compared to 2015, and 47.5% from 2014 to 2015. Average
Canadian rig count in 2016 decreased by 32.3% from 2015,
and 49.3% from 2014 to 2015.
According to data collected by the U.S. Energy Information
Administration (“EIA”), completions in the seven most
prolific areas in the lower 48 states decreased 43.0% in 2016
compared to 2015 and 38.1% from 2014 to 2015.
Outlook for 2017
After a continuous decline in North American drilling rig
activity beginning in mid-2014, the market began to gradually
recover in the second quarter of 2016. Although a continuing
recovery appears to be underway, the level of drilling and
completion activity is still depressed compared to historical
levels. Assuming the price for crude oil remains relatively
stable and regulatory impediments are reduced, the Company
expects North American oilfield activity to improve modestly
throughout 2017.
During 2016, the Company continued to successfully promote
the efficacy of its CnF® chemistries resulting in a 14.7%
increase in CnF® sales volumes compared to 2015, despite a
22
45.4% decline in North American general oilfield activity.
Although quarter to quarter performance may vary, the
Company expects its Energy Chemistry Technologies sales to
outperform market activity metrics over time by continuing to
demonstrate the efficacy of its CnF® chemistries through
comparative analysis of wells with and without CnF®
chemistries, field validation results conducted by E&P
companies, and the continuation of its direct-to-operator sales
program known as the Flotek Store™. Whether operators
purchase directly from Flotek or continue to purchase from
oilfield distribution and service companies, E&P operators are
benefiting from increased price transparency and a more direct
relationship with Flotek’s technical expertise and supply
chain.
In July 2016, the Company acquired 100% of the stock and
interests in International Polymerics, Inc. (“IPI”) and related
entities, a U.S. based manufacturer of high viscosity guar gum
and guar slurry. The IPI business is being integrated into the
Company’s Energy Chemistry Technologies segment as an
important part of the Company’s expanding line of polymer
based chemistries.
The Company’s success in promoting its patented and
proprietary chemistries is supported through its industry
leading research and innovation staff who provide customer
responsive product innovation, as well as development of new
products which are expected to expand the Company’s future
product lines. During the third quarter of 2016, the Company
completed its new Global Research & Innovation Center in
the
Houston. This state-of-the-art facility allows for
development
energy
next-generation
chemistries, as well as expanded collaboration between
clients, leaders from academia, and Company scientists. These
and
opportunities
collaborative
distinguishing capability within the industry.
innovative
important
are
an
of
The outlook for the Company’s consumer and industrial
chemistries will be driven by the availability and demand for
citrus oils, industrial solvents, and flavor and fragrance
ingredients. Although current inventory and crop expectations
are sufficient to meet the Company’s needs to supply its flavor
and fragrance business, as well as both internal and external
industrial markets, the market supply of citrus oils has declined
in recent years due to the reduction in citrus crops caused by
the citrus greening disease. This reduced supply has resulted
in higher citrus oil prices and increased price volatility. The
Company expects terpene prices to remain elevated for the
foreseeable future. However, the Company expects its strong
market position to enable it to maintain a stable supply of citrus
oils for internal use and external sales. The Company expects
to manage the impact of increasing terpene costs through the
development of new product formulations and pricing
strategies.
During the fourth quarter 2016, the Company implemented a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry. The Company initiated a process to
market for sale its Drilling Technologies and Production
Technologies segments and has identified potential buyers.
Marketing efforts are ongoing to ensure the completion of
these sales during 2017.
Results of Continuing Operations (in thousands):
Revenue
Cost of revenue
Gross profit
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
(Loss) income from operations
Operating margin %
Gain on legal settlement
Interest and other expense, net
Income before income taxes
Income tax expense
Income from continuing operations
(Loss) income from discontinued operations, net of tax
Net (loss) income
Capital expenditures for continuing operations, exclusive of
acquisitions, totaled $14.0 million in 2016, inclusive of $6.3
million for the completion of its Global Research & Innovation
Center. The Company expects capital spending to be between
$15 million and $20 million in 2017. The Company will remain
nimble in its core capital expenditure plans, adjusting as
market conditions warrant.
Changes to geopolitical, global economic, and industry trends
could have an impact, either positive or negative, on the
Company’s business. In the event of significant adverse
changes to the demand for oil and gas production and/or the
market price for oil and gas, the market conditions affecting
the Company could change rapidly and materially. Should
such adverse changes to market conditions occur, management
believes the Company has access to adequate liquidity to
withstand the impact of such changes while continuing to make
strategic capital investments and acquisitions, if 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.
Year ended December 31,
2015
2014
2016
262,832
172,154
90,678
34.5 %
80,150
30.5 %
8,530
9,320
(18)
(7,304)
(2.8)%
12,730
(2,282)
3,144
(1,237)
1,907
(51,037)
(49,130)
$
$
$
269,966
173,660
96,306
35.7%
70,276
26.0%
7,108
6,657
(13)
12,278
4.5%
—
(1,644)
10,634
(3,476)
7,158
(20,620)
(13,462)
$
319,852
189,088
130,764
40.9%
61,236
19.1%
6,141
4,787
(19)
58,619
18.3%
—
(1,749)
56,870
(17,248)
39,622
13,981
53,603
$
$
23
Results for 2016 compared to 2015—Consolidated
Consolidated revenue for the year ended December 31, 2016,
decreased $7.1 million, or 2.6%, from 2015. The decrease in
revenue was due to an 11.9% decline in Energy Chemistry
Technologies revenue driven by reduced oilfield market
activity. This was partially offset by a 32.3% increase in
Consumer and Industrial Chemistry Technologies revenue
primarily related to increased citrus terpene prices.
Consolidated gross profit for the year ended December 31,
2016, decreased $5.6 million, or 5.8%, from 2015. Gross
margin as a percentage of revenue decreased to 34.5% for the
year ended December 31, 2016, from 35.7% in 2015, primarily
attributable to increased inventory cost and direct costs
associated with manufacturing in the Consumer and Industrial
Chemistry Technologies segment, partially offset by higher
volumes of all CnF® products sold in Energy Chemistry
Technologies.
Selling, general and administrative (“SG&A”) expenses are
not directly attributable to products sold or services provided.
SG&A costs as a percentage of revenue rose from 26.0% to
30.5% for the year ended December 31, 2016, compared to
2015, as SG&A costs grew while revenues declined. SG&A
costs increased $9.9 million, or 14.1%, for the year ended
December 31, 2016, from 2015, primarily due to higher
professional and legal fees and increased head count in the
Energy Chemistry Technologies sales and support staff for
new business lines.
Depreciation and amortization expense not included in gross
profit for the year ended December 31, 2016, increased by
$1.4 million, or 20.0%, from 2015. This increase was
primarily attributable to the completion and equipping of the
Global Research & Innovation Center in August 2016, along
with other improvements to manufacturing facilities.
Research and Innovation (“R&I”) expense for the year ended
December 31, 2016, increased $2.7 million, or 40.0%, from
2015. The increase in R&I is primarily attributable to Flotek’s
commitment to remaining responsive to customer needs,
increased demand, continued growth of our existing product
lines, and the development of new chemistries which are
expected to expand the Company’s intellectual property
portfolio.
In December 2016, the Company recognized a gain of $12.7
million from a legal settlement related to disgorgement of
potential short-swing trading profits from a stockholder.
Interest and other expense increased $0.6 million for the year
ended December 31, 2016, compared to 2015, primarily due
to the interest rate increases on the term loan and revolving
credit facility effective March 31, 2016, and September 30,
2016, associated with the credit facility amendments.
The Company recorded an income tax provision of $1.2
million, yielding an effective tax provision rate of 39.3%, for
the year ended December 31, 2016, compared to an income
tax provision of $3.5 million, yielding an effective tax
provision rate of 32.7%, in 2015.
The Company implemented a strategic restructuring of its
business to enable a greater focus on its core businesses in
energy chemistry and consumer and industrial chemistry. The
Company initiated a process to market for sale the Drilling
Technologies and Production Technologies segments and has
identified potential buyers. Marketing efforts are ongoing to
ensure the completion of these sales during 2017. The
Company recorded a net loss from discontinued operations of
$51.0 million in 2016 for the classification of the Drilling
Technologies and Production Technologies segments as held
for sale.
Results for 2015 compared to 2014—Consolidated
Consolidated revenue for the year ended December 31, 2015,
decreased $49.9 million, or 15.6%, from 2014. The decrease
in revenue was primarily due to the drop in oilfield market
activity as indicated by the 47.8% decrease in the average
North American active rig count from 2014 to 2015. This
resulted in the Energy Chemistry Technologies segment
experiencing a decline in revenues due to the development of
lower price point products and pricing related to strategic
customer relationships for CnF® sales and reduced customer
demand for non-CnF products. This was partially offset by
increased revenue in the Consumer and Industrial Chemistry
Technologies segment due to increased citrus pricing.
Consolidated gross profit for the year ended December 31,
2015, decreased $34.5 million, or 26.4%, from 2014. Gross
margin as a percentage of revenue decreased to 35.7% for the
year ended December 31, 2015, from 40.9% in 2014, primarily
attributable
in Energy
Chemistry Technologies.
incentive pricing structures
to
Selling, general and administrative (“SG&A”) expenses are
not directly attributable to products sold or services provided.
SG&A costs as a percentage of revenue rose from 19.1% to
26.0% for the year ended December 31, 2015, compared to
2014, as SG&A costs grew while revenues declined. SG&A
costs increased $9.0 million, or 14.8%, for the year ended
December 31, 2015, from 2014, primarily due to higher stock
compensation expense and professional fees, increased head
count in the Energy Chemistry Technologies sales staff,
increased bad debt expense, and a civil penalty related to an
environmental matter assessed in the first quarter of 2015,
partially offset by cost reduction actions taken throughout
2015.
Depreciation and amortization expense not included in gross
profit for the year ended December 31, 2015, increased by
$1.0 million, or 15.7%, from 2014. This increase was primarily
attributable to the depreciation of improvements to facilities
and equipment that were added during the later portion of
2014.
Research and Innovation (“R&I”) expense for the year ended
December 31, 2015, increased $1.9 million, or 39.1%, from
24
2014. The increase in R&I is primarily attributable to Flotek’s
commitment to remaining responsive to customer needs,
increased demand and continued growth of our existing
chemistry product lines and the new Houston R&I facility.
Interest and other expense decreased $0.1 million, or 6.0%,
for the year ended December 31, 2015, compared to 2014.
Results by Segment
The Company recorded an income tax provision of $3.5
million, yielding an effective tax provision rate of 32.7%, for
the year ended December 31, 2015, compared to an income
tax provision of $17.2 million, yielding an effective tax
provision rate of 30.3%, in 2014.
Energy Chemistry Technologies
(dollars in thousands)
Revenue
Gross profit
Gross margin %
Income from operations
Operating margin %
2016
Year ended December 31,
2015
2014
$
$
$
188,233
74,592
39.6%
29,014
15.4%
$
$
$
213,592
81,935
38.4%
43,902
20.6%
$
$
$
268,761
117,867
43.9%
84,846
31.6%
Results for 2016 compared to 2015—Energy Chemistry
Technologies
Energy Chemistry Technologies revenue for the year ended
December 31, 2016, decreased $25.4 million, or 11.9%, from
2015, compared to a 45.4% decline in market activity as
measured by average North American rig count. Flotek’s
Energy Chemistry Technologies segment outperformed these
market indicators by continuing to aggressively promote the
benefits of its CnF® chemistries. CnF® sales volumes
increased 14.7% (revenues increased 11.6%) year over year.
Non-CnF revenues declined approximately 40.8% due to
reduced customer demand resulting from oilfield market
conditions.
Sequentially, quarterly revenues increased 22.5% primarily
from a 12.4% increase in CnF® volumes (21.4% increase CnF®
in revenues). The Company initiated a significant new contract
with a large operator and had increased sales to several
operators and service companies.
Energy Chemistry Technologies gross profit for the year ended
December 31, 2016, decreased $7.3 million, or 9.0%, from
2015, primarily due to the decline in revenue. Gross margin
as a percentage of revenue for the year ended December 31,
2016, increased to 39.6%, compared to 38.4% in 2015. The
increase in gross margin over the period is primarily due to
higher sales volumes of all CnF® products.
Sequentially, margins in the fourth quarter 2016 were lower
by 4.1% resulting from higher freight costs and field service
costs associated with the startup of the new Prescriptive
Chemistry Management™ (“PCM™”) service line, increased
citrus terpene costs, and product mix.
Income
the Energy Chemistry
for
Technologies segment decreased $14.9 million, or 33.9%, for
from operations
the year ended December 31, 2016, compared to 2015. This
decrease is primarily attributable to the decrease in gross
profit, increased costs associated with sales and marketing
efforts in pursuit of growth opportunities, and increased costs
associated with the Company’s continued commitment to its
research and innovation efforts within Energy Chemistry
Technologies.
Results for 2015 compared to 2014—Energy Chemistry
Technologies
Energy Chemistry Technologies revenue for the year ended
December 31, 2015, decreased $55.2 million, or 20.5%, from
2014, compared to a 47.8% decline in market activity as
measured by average North American rig count. Flotek’s
Energy Chemistry Technologies segment outperformed these
market indicators by continuing to aggressively promote the
benefits of CnF® chemistries. CnF® sales volumes increased
18.0% year over year. This success was achieved by
demonstrating the efficacy of its CnF® chemistries through
comparative analysis of wells with and without CnF®
chemistries, field validation results conducted by E&P
companies, and introduction of its direct-to-operator sales
program known as the Flotek Store™. Whether operators
purchase directly from Flotek or continue to purchase from
oilfield distribution and service companies, E&P operators are
benefiting from increased price transparency and a more direct
relationship with Flotek’s technical expertise and supply
chain. CnF® revenues declined 8% year over year due to the
development of lower price point products and pricing related
to strategic customer relationships. Non-CnF revenues
declined approximately 32% due to reduced customer demand
resulting from oilfield market conditions, partially offset by a
strategic supply arrangement with a large service company.
Energy Chemistry Technologies gross profit for the year ended
December 31, 2015, decreased $35.9 million, or 30.5%, from
25
2014, primarily due to the decrease in product sales revenue.
Gross margin as a percentage of revenue for the year ended
December 31, 2015, decreased to 38.4%, compared to 43.9%
in 2014. The decline in gross margin as a percentage of
revenue over the period is primarily due to new incentive
pricing structures associated with new strategic relationships,
partially offset by proportionately higher sales of higher
margin CnF® products.
from operations
Income
the Energy Chemistry
for
Technologies segment decreased $40.9 million, or 48.3%, for
the year ended December 31, 2015, compared to 2014. This
decrease is primarily attributable to the decrease in gross
profit, increased costs associated with sales and marketing
efforts in pursuit of growth opportunities, and increased costs
associated with the Company’s continued commitment to its
research and innovation efforts within Energy Chemistry
Technologies.
Consumer and Industrial Chemistry Technologies
(dollars in thousands)
Revenue
Gross profit
Gross margin %
Income from operations
Operating margin %
Year ended December 31,
2015
2014
2016
$
$
$
74,599
16,086
21.6%
9,664
13.0%
$
$
$
56,374
14,371
25.5%
8,742
15.5%
$
$
$
51,091
12,897
25.2%
6,558
12.8%
Results for 2016 compared to 2015—Consumer and
Industrial Chemistry Technologies
Results for 2015 compared to 2014—Consumer and
Industrial Chemistry Technologies
CICT revenue for the year ended December 31, 2016,
increased $18.2 million, or 32.3%, from 2015. This increase
is due to higher terpene prices associated with limited
availability of citrus oils globally and volume increases in the
Flavor and Fragrance product line.
CICT revenue for the year ended December 31, 2015,
increased $5.3 million, or 10.3%, from 2014. Although global
availability of citrus oil was down in 2015, the Company was
able to pass along the resulting price increases to its customers
producing higher revenue for the period.
CICT gross profit for the year ended December 31, 2016,
increased $1.7 million, or 11.9%, from 2015. Average product
margins decreased 3.5% on product mix and increased raw
material cost. Gross margin as a percentage of revenue
decreased to 21.6% for the year ended December 31, 2016,
compared to 25.5% for 2015, due to lower average product
margins
associated with
manufacturing.
and higher direct
costs
Income from operations for the CICT segment increased $0.9
million, or 10.5%, for the year ended December 31, 2016, from
2015, primarily due to increased sales, partially offset by
increased raw material cost and higher operating expenses
associated with growth in the segment’s Flavor activities.
Discontinued Operations
CICT gross profit for the year ended December 31, 2015,
increased $1.5 million, or 11.4%, from 2014, primarily driven
by increased terpene prices and reduced freight expense
between the two periods. Gross margin as a percentage of
revenue increased slightly to 25.5% for the year ended
December 31, 2015, compared to 25.2% for 2014, due to
higher terpene margins, partially offset by lower flavor and
fragrance margins due to product mix.
Income from operations for the CICT segment increased $2.2
million, or 33.3%, for the year ended December 31, 2015, from
2014, primarily due to the increased margins and a reduction
in indirect salaries and benefits.
During the fourth quarter of 2016, the Company classified the
Drilling Technologies and Production Technologies segments
as held for sale based on management’s intention to sell these
businesses. The Company’s historical financial statements
have been revised to present the operating results of the
Drilling Technologies and Production Technologies segments
as discontinued operations.
26
Drilling Technologies
(dollars in thousands)
Revenue
Gross profit
Gross margin %
(Loss) income from operations
(Loss) income from operations - excluding impairment
Operating margin % - excluding impairment
Results for 2016 compared to 2015—Drilling Technologies
for
Drilling Technologies
the year ended
revenue
December 31, 2016, decreased $24.5 million, or 47.0%, from
2015. The revenue decline was primarily related to the
decrease in drilling rig activity and significant pricing pressure
during the year. Revenue improved 5.6% for the quarter ended
December 31, 2016, compared to the quarter ended September
30, 2016, as market conditions continue to improve.
Drilling Technologies gross profit for the year ended
December 31, 2016, decreased $7.7 million, or 46.3%, from
2015, in line with the decline in revenue. The impact of lower
revenue was offset by lower direct operating costs resulting
from a 46.1% reduction in headcount, decreased depreciation
expense, and lower material and freight costs. These cost
reductions allowed margins as a percentage of revenue to
increase slightly to 32.4% in 2016 from 32.1% in 2015.
During the first quarter of 2016, as a result of the sequential
decline in segment revenue and expectations for future drilling
activity, the Company determined the carrying amount of
certain long-lived assets exceeded their respective fair values
and that some inventory was either not usable in future
operations or the carrying value exceeded its market value. As
a result, an impairment charge of $36.5 million was recorded
to reflect the reduced value of inventory and long-lived assets
in the Drilling Technologies segment.
Drilling Technologies loss from operations for the year ended
December 31, 2016, increased by $17.2 million from 2015,
primarily resulting from first quarter 2016 impairment
charges. Loss from operations, excluding the impairment, for
the year ended December 31, 2016, increased by $0.2 million
from 2015, primarily due to reductions in revenue and pricing
pressure that resulted in customer price concessions. These
volume decreases were offset by a 27.5% reduction in sales
2016
Year ended December 31,
2015
2014
$
$
$
$
27,627
8,961
32.4 %
(44,521)
(7,999)
(29.0)%
$
$
$
$
52,112
16,702
32.1 %
(27,340)
(7,772)
(14.9)%
$
$
$
$
113,302
45,651
40.3%
19,022
19,022
16.8%
and administrative cost reductions throughout the year,
including employee related expenses and reduced travel costs.
Results for 2015 compared to 2014—Drilling Technologies
for
Drilling Technologies
the year ended
revenue
December 31, 2015, decreased $61.2 million, or 54.0%, from
2014, due to a 64.0% decrease in domestic revenue primarily
from lower activity levels and significant pricing reductions
partially offset by an increase in Teledrift International
revenue.
Drilling Technologies gross profit for the year ended
December 31, 2015, decreased $28.9 million, or 63.4%, from
2014. Gross margin as a percentage of revenue decreased to
32.1%, compared to 40.3% in 2014. This was primarily due
to pricing decreases, partially offset by a 38% reduction in
direct costs including personnel and freight costs.
During the second quarter of 2015, as a result of decreased rig
activity and its impact on management’s expectations for
future market activity, the Company refocused the Drilling
Technologies segment to businesses and markets that have the
best opportunity for profitable growth in the future. As a result,
an impairment charge of $19.6 million was recorded to reflect
the reduced value of inventory and rental equipment
associated with product lines and markets the Company exited.
Drilling Technologies income (loss) from operations for the
year ended December 31, 2015, decreased by $46.4 million
from 2014, primarily resulting from the second quarter
impairment charge and margin decreases. Income (loss) from
operations, excluding the impairment, for the year ended
December 31, 2015, decreased by $26.8 million from 2014,
primarily due to lower margins, partially offset by a 6.5%
decrease in SG&A costs in 2015, including lower personnel
and travel costs.
27
Production Technologies
(dollars in thousands)
Revenue
Gross profit
Gross margin %
(Loss) income from operations
(Loss) income from operations - excluding impairment
Operating margin % - excluding impairment
2016
Year ended December 31,
2015
2014
$
$
$
$
8,292
411
5.0 %
(8,815)
(4,902)
(59.1)%
$
$
$
$
12,281
2,101
17.1 %
(4,111)
(3,307)
(26.9)%
$
$
$
$
16,003
6,544
40.9%
3,246
3,246
20.3%
Results for 2016 compared to 2015—Production
Technologies
Results for 2015 compared to 2014—Production
Technologies
Revenue for the Production Technologies segment for the year
ended December 31, 2016, decreased by $4.0 million, or
32.5%, from 2015, primarily due to decreased sales of rod
pump equipment and older technology ESP equipment.
Sequentially, revenue increased by 5.3% in the fourth quarter
2016, compared to third quarter 2016.
Production Technologies gross profit decreased by $1.7
million for the year ended December 31, 2016, compared to
2015. Gross margin as a percentage of revenue decreased to
5.0% for the year ended December 31, 2016, compared to
17.1% in 2015, primarily due to declining sales volumes and
product pricing pressure throughout 2016. Sequentially,
quarterly gross margins are improving, increasing 4.4% on
increased revenue and improved pricing.
As a result of the introduction of newer and proprietary
technology, as well as lower demand for older technologies,
the Company evaluated its Production Technologies inventory
for impairment leading to the recording of an impairment
charge of $3.9 million for inventory in the first quarter of 2016.
Loss from operations increased by $4.7 million for the year
ended December 31, 2016, from 2015. Loss from operations,
excluding the impairment, increased by $1.6 million for the
year ended December 31, 2016, from 2015. These increased
losses are primarily due to lower revenue volume and lower
margins due to pricing pressure. SG&A costs have decreased
by 8.8% year over year due to reduced employment costs and
decreased travel costs, partially offsetting the impact of the
decreased revenue.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements arise from the
Company’s need to service debt, acquire and maintain
equipment, fund working capital requirements, and when the
opportunities arise, to make strategic acquisitions and
repurchase Company stock. During 2016, the Company
Revenue for the Production Technologies segment for the year
ended December 31, 2015, decreased by $3.7 million, or
23.3%, from 2014, as sales of international Petrovalve® tools
and domestic lifting units decreased by $4.8 million, or 96.4%,
in 2015 offset by a slight increase of $0.9 million, or 8.2%,
increase in rod pump equipment sales.
Production Technologies gross profit decreased by $4.4
million, or 67.9%, for the year ended December 31, 2015,
compared to 2014. Gross margin as a percentage of revenue
decreased to 17.1% for the year ended December 31, 2015,
compared to 40.9% in 2014, primarily due to decreased high
margin international Petrovalve® sales.
As a result of the shift in focus towards oil production markets
and away from CBM markets, the Company evaluated its
CBM inventory during the second quarter of 2015. This
evaluation led to the recording of an impairment of $0.8
million in CBM inventory in the second quarter of 2015.
Income (loss) from operations decreased by $7.4 million for
the year ended December 31, 2015 from 2014. Income (loss)
from operations, excluding the impairment, decreased by $6.6
million for the year ended December 31, 2015 from 2014.
These decreases are primarily due
the decreased
international Petrovalve® margins and higher SG&A expenses
attributable to employee-related expenses as the segment
continues to refocus and reposition for growth in the market.
to
funded capital requirements primarily with operating cash
flows, debt financing, and the issuance of company stock.
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 and a term loan
secured by substantially all of the Company’s domestic and
28
Canadian real and personal property, including accounts
receivable, inventory, land, buildings, equipment, and other
intangible assets. As of December 31, 2016, the Company had
$38.6 million in outstanding borrowings under the revolving
debt portion of the Credit Facility and $9.8 million outstanding
under the term loan. Effective September 30, 2016, the
Company entered into a Sixth Amendment to the Credit
Facility which extends the facility term to May 10, 2020,
modifies certain covenants and restrictions, and reestablishes
a fixed charge coverage ratio for March 31, 2017 and leverage
ratio for June 30, 2017. Significant terms of the Credit Facility
are discussed in Note 12 – “Long-Term Debt and Credit
Facility” in Part II, Item 8 – “Financial Statements and
Supplementary Data” of this Annual Report.
At December 31, 2016, the Company remained compliant
with the continued listing standards of the NYSE.
Cash and cash equivalents
totaled $4.8 million at
December 31, 2016. During 2016, the Company received
proceeds of $30.1 million, net of issuance costs, from the
private placement of 2.5 million common shares, which was
used to pay down outstanding borrowings under the revolving
credit facility and to purchase IPI. The Company generated
$2.1 million of cash inflows from continuing operations (net
of $6.1 million expended in working capital). Offsetting these
cash inflows, the Company paid $7.9 million associated with
the purchase of 100% of the stock and interests in IPI, used
$14.0 million for capital expenditures, used $2.1 million for
repayments of debt, net of borrowings, and $2.4 million for
purchases of treasury stock for tax withholding purposes
related to the vesting of restricted stock awards and the
exercise of non-qualified stock options.
Liquidity
The Company plans to spend between $15 million and $20
million for committed and planned capital expenditures in
2017. During 2017, the Company plans to use internally
generated funds and, if necessary, borrowings under the
revolving line of credit to fund operations and capital
expenditures and make required payments on the term loan.
Any excess cash generated may be used to pay down the level
of debt or be retained for future use. The Company does not
anticipate repurchasing any shares under its share repurchase
programs in the near future.
Net Debt
Net debt represents total debt less cash and cash equivalents and combines the Company’s indebtedness and the cash and cash
equivalents that could be used to repay that debt. Components of net debt are as follows (in thousands):
December 31, 2016 December 31, 2015
Cash and cash equivalents
Current portion of long-term debt
Long-term debt, less current portion
Net debt
$
$
$
4,823
(40,566)
(7,833)
(43,576) $
2,208
(32,291)
(18,255)
(48,338)
Cash Flows
Cash flow metrics from the consolidated statements of cash flows are as follows (in thousands):
Year ended December 31,
2015
2014
2016
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net cash flows used in discontinued operations
Effect of changes in exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
$
$
2,054
(22,281)
22,851
(6)
(3)
2,615
$
$
25,472
(17,005)
(7,349)
—
(176)
942
$
$
42,644
(15,660)
(28,440)
—
(8)
(1,464)
Operating Activities
During 2016, 2015, and 2014, cash from operating activities
totaled $2.1 million, $25.5 million, and $42.6 million,
respectively. Consolidated net income for 2016 totaled $1.9
million, compared to consolidated net income of $7.2 million
and $39.6 million for 2015 and 2014, respectively.
Net non-cash contributions to net income in 2016, totaled $6.3
million. Contributory non-cash items consisted primarily of
29
$10.9 million for depreciation and amortization expense,
$12.1 million for stock compensation expense, $2.5 million
for reduction in incremental tax benefit related to share-based
awards, and $0.6 million for provisions related to accounts
receivables, partially offset by $19.7 million for changes to
deferred income taxes.
Net non-cash contributions to net income in 2015, totaled
$13.3 million. Contributory non-cash
items consisted
primarily of $9.1 million for depreciation and amortization
expense, $13.1 million for stock compensation expense, and
$0.4 million for provisions related to accounts receivables,
partially offset by $7.9 million for changes to deferred income
taxes and $1.3 million for excess tax benefit related to share-
based awards.
Net non-cash contributions to net income in 2014, totaled
$15.4 million. Contributory non-cash
items consisted
primarily of $8.1 million for depreciation and amortization
expense, $9.1 million for stock compensation expense, and
$1.5 million for changes to deferred income taxes, partially
offset by $3.4 million for excess tax benefit related to share-
based awards.
resulting
During 2016, changes in working capital used $6.1 million in
cash, primarily
increasing accounts
receivables, inventories, income taxes receivable, and other
current assets by $40.8 million and decreasing income taxes
payable by $2.0 million, partially offset by increasing accounts
payable and accrued liabilities by $36.6 million.
from
During 2015, changes in working capital provided $3.4
million in cash, primarily resulting from decreasing accounts
receivable and other current assets by $13.8 million and
increasing accrued liabilities, income taxes payable, and
interest payable by $11.8 million, partially offset by increasing
inventories and income taxes receivable by $14.6 million and
decreasing accounts payable by $7.7 million.
During 2014, changes in working capital used $13.7 million
in cash, primarily resulting from increasing accounts
receivables, inventories, and other current assets by $44.5
million, partially offset by increasing accounts payable,
accrued liabilities, and income taxes payable by $30.8 million.
Investing Activities
Net cash used in investing activities was $22.3 million during
2016. Cash used in investing activities primarily included
$14.0 million for capital expenditures, $7.9 million associated
with the purchase of 100% of the stock and interests of IPI,
and $0.6 million for the purchase of patents and intangible
assets.
Net cash used in investing activities was $17.0 million during
2015. Cash used in investing activities primarily included
$16.4 million for capital expenditures and $0.6 million for the
purchase of patents and intangible assets.
Net cash used in investing activities was $15.7 million during
2014. Cash used in investing activities primarily included $9.3
30
million for capital expenditures, $5.7 million associated with
the purchase of Eclipse IOR Services, LLC and SiteLark, LLC,
and $0.7 million for the purchase of patents and intangible
assets, partially offset by $0.1 million of proceeds received
from the sale of fixed assets.
Financing Activities
During 2016, net cash generated through financing activities
was $22.9 million. Cash generated through financing activities
was primarily due to receiving $30.9 million in proceeds from
the sale of common stock, inclusive of $30.1 million, net of
issuance costs, from the private placement of 2.5 million
common shares on July 27, 2016. Cash generated through
financing activities was partially offset by using $2.1 million
for repayments of debt, net of borrowings, reductions in tax
benefit related to stock-based compensation of $2.5 million,
purchases of treasury stock for tax withholding purposes
related to the vesting of restricted stock awards and the
exercise of non-qualified stock options of $2.4 million, and
payments of debt issuance costs of $1.2 million.
During 2015, net cash used in financing activities was $7.3
million. Cash used in financing activities was primarily due
to $6.3 million for purchases of treasury stock for tax
withholding purposes related to the vesting of restricted stock
awards and the exercise of non-qualified stock options, and
$9.7 million for the repurchase of common stock. Cash used
in financing activities was partially offset by receiving $6.5
million for borrowings of debt, net of repayments, proceeds
from
to stock-based
compensation of $1.3 million, and proceeds from the sale of
common stock of $0.9 million.
tax benefit related
the excess
During 2014, net cash used in financing activities was $28.4
million. Cash used in financing activities was primarily due
to $18.1 million for repayments of debt, net of borrowings,
$6.3 million for purchases of treasury stock for tax
withholding purposes related to the vesting of restricted stock
awards and the exercise of non-qualified stock options, and
$10.4 million for the repurchase of common stock. Cash used
in financing activities was partially offset by proceeds from
the excess tax benefit related to stock-based compensation of
$3.4 million, proceeds from exercise of stock options and
warrants of $2.0 million, and proceeds from the sale of
common stock of $0.9 million.
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,
2016, the Company was not involved in any unconsolidated
SPEs.
The Company has not made any guarantees to customers or
vendors nor does the Company have any off-balance sheet
arrangements or commitments that have, or are reasonably
likely to have, a current or future effect on the Company’s
financial condition, change in financial condition, revenue,
expenses, results of operations, liquidity, capital expenditures,
or capital resources that are material to investors.
receivable collections, inventory management, and the timing
of payments for goods and services. Correspondingly, the
impact of contractual obligations on the Company’s liquidity
and capital resources in future periods is analyzed in
conjunction with such factors.
Contractual Obligations
Cash flows from operations are dependent on a variety of
factors, including fluctuations in operating results, accounts
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, 2016 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
9,833
1,468
38,566
23,965
73,832
$
$
Less than
1 year
$
$
2,000
587
38,566
2,750
43,903
1 - 3 years
4,000
$
780
—
4,723
9,503
$
3 -5 years
3,833
$
101
—
3,996
7,930
$
More than
5 years
$
$
—
—
—
12,496
12,496
(1)
Interest expense amounts assume interest rates on this variable rate obligation remain unchanged from December 31, 2016 rates. The weighted-average
interest rate was 4.55% at December 31, 2016.
(2) The borrowing is classified as current debt. The weighted-average interest rate was 3.92% at December 31, 2016.
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 (“U.S. 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 Part II, Item 8 – “Financial
Statements and Supplementary Data” of this Annual Report.
The Company believes the following accounting policies are
critical due to the significant, subjective, and complex
judgments and estimates required when preparing the
consolidated financial statements. The Company regularly
reviews judgments, assumptions, and estimates to the critical
accounting policies.
Basis of Presentation
During the fourth quarter of 2016, the Company classified the
and Production Technologies
Drilling Technologies
reportable segments’ operations as held for sale based on
management’s intention to sell these businesses. The operating
results of these segments have been reported as discontinued
operations in the consolidated financial statements. Amounts
previously reported have been reclassified to conform to this
presentation
to allow for meaningful comparison of
continuing operations.
Revenue Recognition
Revenue for product sales and services is recognized when all
of the following criteria have been met: (a) persuasive
evidence of an arrangement exists, (b) products are shipped
or services rendered to the customer and all significant risks
and rewards of ownership have passed to the customer, (c) the
price to 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.
Revenue and associated accounts receivable in the Energy
Chemistry Technologies, Consumer and Industrial Chemistry
Technologies, Drilling Technologies, and Production
Technologies segments are recorded at the agreed price when
the aforementioned conditions are met. Generally, a signed
proof of obligation is obtained from the customer (delivery
ticket or field bill for usage). Deposits and other funds received
in advance of delivery are deferred until the transfer of
ownership is complete.
For certain contracts related to the EOGA division and the
Logistics division of the Energy Chemistry Technologies
segment, the Company recognizes revenue under the
percentage-of-completion method of accounting, measured
31
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 indirect
costs related to manufacturing and construction operations.
General and administrative costs are charged to expense as
incurred. Changes in job performance metrics and estimated
profitability, including those arising from contract bonus and
penalty provisions and final contract settlements, may
periodically result in revisions to revenue and expenses and
are recognized in the period in which such revisions become
probable. Known or anticipated losses on contracts are
recognized when such amounts become probable and
estimable.
Within the Drilling Technologies 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 remittance to the
respective taxing authorities.
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 that collectability is
reasonably assured. The Company also considers the overall
business climate in which its customers operate.
These uncertainties require the Company to make frequent
judgments and estimates 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 a receivable has been
outstanding.
The majority of the Company’s customers operate in the
energy industry. The cyclical nature of the industry may affect
customers’ operating performance and cash flows, which
could impact the Company’s ability to collect on these
obligations. Additionally, some customers are located in
international areas that are inherently subject to risks of
economic, political, and civil instability.
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, 2016, the allowance was 1.4% of
gross accounts receivable, compared to an allowance of 2.0%
a year earlier. While credit losses have historically been within
expectations and the provisions established, should actual
write-offs differ from estimates, revisions to the allowance
would be required.
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.
The Company regularly reviews inventory quantities on hand
and records provisions or impairments for excess or obsolete
inventory based on the Company’s forecast of product
demand, historical usage of inventory on hand, market
conditions, production and procurement requirements, and
technological developments. Significant or unanticipated
changes in market conditions or Company forecasts could
affect the amount and timing of provisions for excess and
obsolete inventory and inventory impairments.
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 conditions result in adjustments to management
assumptions, impairment losses could be realized in future
periods.
At December 31, 2016 and 2015, the Company recorded an
impairment for all inventory items identified as excess and
obsolete inventory.
Business Combinations
the fair value of purchase
The Company allocates
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
32
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 value of the acquired assembled workforce.
Acquisition-related expenses are recognized separately from
the business acquisition and are recognized as expenses as
incurred.
The purchase price allocation process requires management
to make significant estimates and assumptions at the
acquisition date with 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 on historical experience and
information obtained from the management of the acquired
companies and are inherently uncertain.
Goodwill
Goodwill is not subject 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 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 impairment at a reporting unit level. At
December 31, 2016, four reporting units have a goodwill
balance. Energy Chemistry Technologies and Consumer and
Industrial Chemistry Technologies are reporting units in
continuing operations and Teledrift and Production
Technologies are reporting units in discontinued operations.
During the annual testing, the Company assesses whether a
goodwill impairment exists using both qualitative and
quantitative assessments. The qualitative assessment involves
determining whether events or circumstances exist that
indicate it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, including
goodwill. If, based on this qualitative assessment, it 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.
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.
33
If quantitative impairment testing is performed, the Company
uses a two-step process. The first step is to compare the
estimated fair value of each reporting unit which has goodwill
to its carrying amount, including goodwill. To determine fair
value estimates, the Company uses the income approach based
on discounted cash flow analyses, combined, when
appropriate, with a market-based approach. The market-based
approach considers valuation comparisons of recent public
sale transactions of similar businesses and earnings multiples
of publicly traded businesses operating in industries consistent
with the reporting unit. If the fair value of a reporting unit is
less than its carrying value, the second step of the impairment
test is performed to determine the amount of impairment, if
any. The second step compares the implied fair value of the
reporting unit goodwill with the carrying amount of the
goodwill. If the carrying amount of the reporting unit’s
goodwill exceeds its implied value, an impairment loss is
recognized in an amount equal to that excess.
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
make assumptions and to apply judgments regarding industry
economic factors and the profitability of future business
strategies. The Company’s policy is to conduct impairment
testing based on current business strategies, taking into
consideration current industry and economic conditions as
well as the Company’s future expectations. Key assumptions
used in the 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 considerations and Company-specific historical and
projected results to develop cash flow projections for each
reporting unit. Additionally, if appropriate, as part of the
market-based 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.
During annual goodwill impairment testing in 2016, 2015, and
2014, the Company first assessed qualitative factors to
determine whether it was necessary to perform the two-step
goodwill impairment test. Based on its qualitative assessment,
the Company concluded there was no indication of impairment
of goodwill as of the fourth quarter of 2014 and therefore no
further testing was required.
As of the fourth quarter of 2016, the Company concluded it
was not more likely than not that there was an impairment of
goodwill for the Consumer and Industrial Chemistry
Technologies or Energy Chemistry Technologies reporting
units based on the assessment of qualitative factors. The
Consumer and Industrial Chemistry Technologies reporting
unit has outpaced prior years revenues and maintained strong
margins. The Energy Chemistry Technologies reporting unit
saw revenue reduced by 12% versus 2015 as market activity
fell 43% from 2015 to 2016. However, the segment continued
to produce strong margins.
The Company was not able to conclude that it was not more
likely than not that the estimated fair value of the Teledrift and
the
Production Technologies reporting units exceeded
carrying value of the respective reporting units. Therefore, the
Company performed a Step 1 impairment test for each of these
reporting units. The results of the Step 1 test indicated that the
estimated fair values of the two reporting units exceeded the
carrying value of their respective reporting units by
approximately $13.2 million and $6.7 million respectively, or
an excess of 34% and 44%, respectively, over the carrying
value. Therefore, no further testing was required for these two
reporting units. To evaluate the sensitivity of the fair value
calculations of the Teledrift and Production Technologies
reporting units, the Company applied a hypothetical 10%
unfavorable change in the weighted average cost of capital,
which would have reduced the estimated fair value of the
Teledrift and Production Technologies reporting units by
approximately $5.3 million and $4.2 million, respectively.
These sensitivity analyses were not indicative of an
impairment for the Teledrift or Production Technologies
reporting units.
reporting unit,
As of the third quarter of 2016, the Company concluded it was
not more likely than not that there was an impairment of
goodwill for the Consumer and Industrial Chemistry
Technologies
the Energy Chemistry
Technologies reporting unit, and the Teledrift reporting unit
based on the assessment of qualitative factors. The Consumer
and Industrial Chemistry Technologies reporting unit has seen
increased revenues in 2016 compared to 2015 and has
maintained margins in the range seen from 2014 through 2015.
The Energy Chemistry Technologies reporting unit had an
11% decrease in revenue versus the 27% decline in market
activity for the first quarter of 2016 compared to the fourth
quarter of 2015, a 3% decrease in revenue versus the 35%
decline in market activity for the second quarter of 2016
compared to the first quarter of 2016, and a 4% increase in
revenue versus the 28% increase in market activity for the
third quarter of 2016 compared to the second quarter of 2016,
but continues to maintain gross margins. The Teledrift
reporting unit, having passed the Step 1 impairment tests in
the previous two quarters, had the highest revenue quarter for
2016 and improved margins. Teledrift revenue for the third
quarter of 2016 increased 37% versus the second quarter of
2016 and improved gross margins by 8.4%.
For the first quarter of 2016, the Company was not able to
conclude that it was not more likely than not that the estimated
fair value of the Production Technologies and Teledrift
reporting units exceeded the carrying value of the respective
reporting units. Therefore, the Company performed a Step 1
impairment test for each of these reporting units. The results
of the Step 1 test indicated that the estimated fair values of the
Production Technologies and the Teledrift reporting units
exceeded the carrying value of their respective reporting units
by approximately $34.9 million and $2.1 million, respectively,
or an excess of 153% and 5%, respectively, over the carrying
value. Therefore, no further testing was required for these two
reporting units.
Again, for the second quarter of 2016, the Company was not
able to conclude that it was not more likely than not that the
estimated fair value of the Production Technologies and
Teledrift reporting units exceeded the carrying value of the
respective reporting units. Therefore, the Company performed
a Step 1 impairment test for each of these reporting units. The
results of the Step 1 test indicated that the estimated fair values
of the Production Technologies and the Teledrift reporting
units exceeded the carrying value of their respective reporting
units by approximately $17.1 million and $2.2 million,
respectively, or an excess of 77% and 6%, respectively, over
the carrying value. Therefore, no further testing was required
for these two reporting units.
Once again, for the third quarter of 2016, the Company was
not able to conclude that it was not more likely than not that
the estimated fair value of the Production Technologies
reporting unit exceeded the carrying value of the reporting
unit. Therefore, the Company performed a Step 1 impairment
test for this reporting unit. The results of the Step 1 test
indicated that the estimated fair value of the Production
Technologies reporting unit exceeded the carrying value of the
reporting unit by approximately $8.1 million, or an excess of
36.9% over the carrying value. Therefore, no further testing
was required for this reporting unit.
Key assumptions and estimates were based on experience of
the Company’s management, experience with past recessions
within the oil and gas industry (specifically the 2008/2009
recession), and internal as well as published external
perspectives of recovery timing. Key assumptions used in the
discounted cash flow analysis included:
• U.S. rig count bottoms during 2016 and begins to
recover to average 532 rigs for the last two quarters
of 2016. Average Rig count climbs to 725 in 2017,
880 in 2018, and 920 in 2019, and grows by 50 rigs
annually for 2020 through 2023, and then holds flat
through 2026;
International revenue grows 3% annually;
•
• Domestic rental revenue per rig and total domestic
revenue per rig dip to lows seen during the 2008/2009
downturn through 2017 and then slowly return to the
lower end of the ranges seen between 2012 and 2014;
34
•
International indirect expenses remain 3.5% of total
international revenue;
• Domestic indirect expense percentages slowly return
to historical levels;
• Margins stay in the lower portion of historical
ranges;
• Working capital ratios remain consistent; and
• Risk premium related to foreign country security and
government stability.
Some of the factors that affected the change in results of the
Step 1 impairment test from the fourth quarter of 2015 to the
fourth quarter of 2016 included:
•
•
Impairment testing of long-lived assets excluding
goodwill resulted in a reduction to the balance sheet
of $14.3 million for the Teledrift reporting unit in the
first quarter of 2016.
Impairment of inventory resulted in a reduction to
the balance sheet of $1.3 million for the Teledrift
reporting unit and $3.9 million for the Production
Technologies reporting unit in the first quarter of
2016.
• Cost reduction initiatives during the first half of 2016
reduced direct and indirect expenses for the Drilling
Technologies segment.
• Due to the surplus of rental tools and the low levels
of drilling rig activity, capital expenditures for new
rental tools will be minimal through 2019 in the
Teledrift reporting unit.
Based on the Company’s fourth quarter 2016 testing of
goodwill for
impairment at each reporting unit, no
impairments were recorded.
The business of the Drilling Technologies segment is closely
aligned with the drilling rig count and the U.S. drilling rig
count declined approximately 55% during the first and second
quarters of 2015. Revenue of the Drilling Technologies
segment declined over 30% compared to the fourth quarter of
2014, although the segment’s gross margin was rising
moderately. The drop off in business resulting from declines
in oil prices and the active drilling rig count was an event or
circumstance that caused the Company to test its recorded
goodwill in the Teledrift reporting unit within the Drilling
Technologies segment (deterioration
the operating
environment and overall financial performance of the
reporting unit) during the second quarter of 2015. In addition,
the Company took a look at its business to ascertain whether
there were operating changes that needed to be made.
in
Impairment of goodwill was not tested for other reporting units
during the second quarter of 2015 as revenue and margins in
the Energy Chemistry Technologies and the Consumer and
Industrial Chemistry Technologies reporting units had been
increasing. Goodwill of $1.7 million in the Production
Technologies reporting unit resulted from a 2015 acquisition
which provided an avenue for new products and additional
revenue.
Goodwill of $15.3 million in the Teledrift reporting unit was
tested for impairment during the second quarter of 2015. The
primary technique utilized to estimate the fair value of the
Teledrift reporting unit was a discounted cash flow analysis.
Discounted cash flow analysis requires the Company to make
various judgments, estimates and assumptions about future
revenue, margins, growth rates, capital expenditures, working
capital and discount rates. The first step in the impairment
testing process compared the estimated fair value of the
reporting unit to its carrying amount, including goodwill. The
analysis indicated a fair value in excess of the carrying amount
by approximately 97% for the Teledrift reporting unit.
Because the fair value of the reporting unit exceeded its
carrying amount, the second step of the goodwill impairment
test was not necessary.
As of the fourth quarter of 2015, the Company concluded it
was not more likely than not that there was an impairment of
goodwill for the Consumer and Industrial Chemistry
Technologies reporting unit based on the assessment of
qualitative factors. The Consumer and Industrial Chemistry
Technologies reporting unit has seen increased revenues in
2015 compared to 2014 and has maintained gross margins.
However, the Company was not able to conclude that it was
not more likely than not that the estimated fair value of the
Energy Chemistry Technologies, Teledrift, and Production
Technologies reporting units exceeded the carrying value of
the respective reporting units. Therefore, the Company
performed a Step 1 impairment test for each of these reporting
units. The results of the Step 1 test indicated that the estimated
fair values of the Energy Chemistry Technologies and
the
Production Technologies reporting units exceeded
carrying value of their respective reporting units by
approximately $217.3 million and $35.8 million respectively,
or an excess of 156% and 141%, respectively, over the carrying
value. Therefore, no further testing was required for these two
reporting units. To evaluate the sensitivity of the fair value
calculations of the Energy Chemistry Technologies and
Production Technologies reporting units, the Company
applied a hypothetical 10% unfavorable change in the
weighted average cost of capital, which would have reduced
the estimated fair value of the Energy Chemistry Technologies
and Production Technologies
by
approximately $44.0 million and $8.6 million, respectively.
These sensitivity analyses were not indicative of an
impairment for the Energy Chemistry Technologies or
Production Technologies reporting units.
reporting
units
The Step 1 impairment test for the Teledrift reporting unit
indicated that the estimated fair value of the reporting unit was
less than the carrying value by approximately $1.4 million;
therefore, the Company performed a Step 2 impairment test
with the assistance of a third party valuation firm. The results
of the Step 2 impairment test indicated that the implied fair
value of goodwill exceeded the carrying value of the goodwill
for the Teledrift reporting unit by approximately $2.0 million,
or an excess of 15% over the carrying value. To evaluate the
sensitivity of the fair value calculation for the Teledrift
35
reporting unit, the Company applied a hypothetical 10%
unfavorable change in the weighted average cost of capital,
which would have reduced the estimated fair value of goodwill
by approximately $0.7 million which was not indicative of an
impairment of goodwill.
Key assumptions and estimates were based on experience of
the Company’s management, experience with past recessions
within the oil and gas industry (specifically the 2008/2009
recession), and internal as well as published external
perspectives of recovery timing. Key assumptions used in the
discounted cash flow analysis included:
• US rig count bottoms at year end around 700 rigs in
2015 to average 983 rigs for 2015. Rig count climbs
to 875 in 2016, continues to 1,000 rigs in 2017 and
grows 5% annually for 2018 through 2020, and then
grows 7% annually through 2025;
International revenue grows 3% annually;
•
• Domestic rental revenue per rig and total domestic
revenue per rig dip to lows seen during the 2008/2009
downturn through 2017 and then slowly return to the
lower end of the previous three year range;
•
International indirect expenses remain 3.5% of total
international revenue;
• Domestic indirect expense percentages slowly return
to historical levels;
• Margins stay in historical ranges;
• Working capital ratios remain consistent; and
• Risk premium related to foreign country security and
government stability.
Some of the factors that affected the change in results of the
Step 1 impairment test from the second quarter of 2015 to the
fourth quarter of 2015 included:
• Crude oil prices had rallied during the second quarter
to average $59.82 per barrel in June 2015 versus the
January 2015 average of $47.22 per barrel, but
subsequently fell during the third and fourth quarters
to average $37.19 per barrel in December 2015,
• The dramatic decline in US rig activity had leveled
off during June 2015 after having declined 53.3%
from the rig activity level as of December 31, 2014,
only to decrease another 18.7% in the second half of
2015 to end the year with an outright drop in rig
activity of 62.1%.
• The weighted average cost of capital increased from
14.1% in the second quarter of 2015 to 19.1% in the
fourth quarter of 2015 as the significance of the
international portion of the reporting unit grew,
resulting in a higher risk premium associated with
international activity.
There are significant inherent uncertainties and judgments
involved in estimating fair value. A further extension or
deepening of the industry downturn could have a negative
impact on the cash flow analysis.
36
The Company cannot predict the occurrence of events or
circumstances that could adversely affect the fair value of
goodwill. Such events may include, but are not limited to,
deterioration of the economic environment, increases in the
Company’s weighted average cost of capital, material negative
changes
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.
in
Based on the Company’s fourth quarter 2015 testing of
goodwill for
impairment at each reporting unit, no
impairments were recorded.
Long-Lived Assets Other than Goodwill
Long-lived assets other than goodwill consist of property and
equipment and intangible assets that have determinable and
indefinite lives. The Company makes judgments and estimates
regarding the carrying value of these assets, including amounts
to be capitalized, depreciation and amortization methods to be
applied, estimated useful lives, and possible impairments.
intangible assets with
Property and equipment and
determinable lives are tested for impairment whenever events
or changes in circumstances indicate the carrying value of the
asset may not be recoverable.
For property and equipment, events 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 of an asset exceeds the 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.
intangible assets with definite
lives, events or
For
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 fair value. Fair value of these
assets may be determined by a variety of methodologies,
including discounted cash flows.
Intangible assets with indefinite lives are not subject to
amortization, but are tested 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.
The Company assesses whether an indefinite lived intangible
impairment exists using both qualitative and quantitative
assessments. The qualitative assessment involves determining
whether events or circumstances exist that indicate it is more
likely than not that the fair value of the indefinite lived
intangible is less than its carrying amount. If, based on this
qualitative assessment, it is determined that it is not more likely
than not that the fair value of the indefinite lived intangible is
less than its carrying amount, the Company does not perform
a quantitative assessment.
If the qualitative assessment indicates that it is more likely
than not that the indefinite-lived intangible asset is impaired
or if the Company elects to not perform a qualitative
assessment, the Company then performs the quantitative
impairment test. The quantitative impairment test for an
indefinite-lived intangible asset consists of a comparison of
the fair 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.
to
the Company uses
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
internally manage
operations. When potential impairment is identified, a
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
the
management
assumptions used are reflective of what a market participant
would have used in calculating fair value.
judgment. The Company believes
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 the extent that changes in the current business
climate result in adjustments to management projections,
impairment losses may be recognized in future periods.
The domestic drilling industry has continued to deteriorate
since the end of 2015 to levels not seen since April 1999. As
the business of the Drilling Technologies segment is closely
37
aligned with the drilling rig count and average U.S. drilling
rig count declined 27% during the first quarter of 2016, the
drop off in rig count led to a decline in revenue and gross profit
of 37% and 69%, respectively, from the fourth quarter of 2015
for the Drilling Technologies segment. As a result of the
continued drop in rig count and the significant decline in
operations in the first quarter of 2016, the Company concluded
these were events or circumstances that caused the Company
to test its long-lived assets for impairment within the segment.
During the three months ended March 31, 2016, the Company
completed testing for impairment of long-lived assets within
the Drilling Technologies segment for four asset groups:
• Downhole Tools - primarily used in the vertical
•
drilling market;
International Drill Pipe - primarily used in foreign
mining operations;
• Teledrift Domestic - primarily associated with the
Measurement While Drilling (“MWD”) market in
the U.S.; and
• Teledrift International - primarily associated with the
MWD market in international markets.
Impairment indicators affected both asset groups that are tied
directly to the domestic drilling market. While impairment
indicators are not present for the International Drill Pipe or
Teledrift International asset groups, the Company performed
recoverability tests for all four asset groups.
The recoverability test indicated that the undiscounted
estimated cash flows of the International Drill Pipe and
Teledrift International asset groups exceeded the carrying
value of their respective asset groups by approximately $2.6
million and $64.1 million, respectively, or an excess of 98%
and 906%, respectively. However, the undiscounted estimated
cash flows of the Downhole Tools and Teledrift Domestic asset
groups did not exceed the carrying value of their respective
asset groups, and therefore, the Company performed a
discounted cash flow analysis on each asset group to determine
the fair values.
Since the assets in the asset groups are not highly specialized,
the Company assumed the current use of each asset would be
a similar use as if the assets were sold. As such, the cash flow
used in the recoverability test is the same cash flow used to
create the discounted cash flow for fair value analysis. This
testing indicated that the carrying value of the Downhole Tools
and Teledrift Domestic asset groups exceeded the fair value
by $9.6 million and $14.3 million, respectively, or an excess
of 69% and 56%, respectively. As a result, a combined
impairment loss for these two asset groups of $23.9 million
was recognized during the three months ended March 31,
2016.
Additionally, the business of the Production Technologies
segment incurred similar declines with revenue and gross
profit, falling approximately 30% and 42%, respectively.
Therefore, the Company completed testing for impairment of
the Production Technologies
long-lived assets within
test
The recoverability
segment.
the
undiscounted estimated cash flows for the segment exceeded
the carrying value of assets by $3.0 million, or an excess of
23%. As a result, no impairment of long-lived assets was
recognized for the Production Technologies segment.
indicated
that
During the second quarter of 2016, the average U.S. drilling
rig count fell 23% versus the first quarter of 2016. The Drilling
Technologies segment held revenue relatively flat and
improved margins when comparing the second and first
quarters of 2016. As such, the Company determined that
testing for impairment of long-lived assets was not warranted
for the segment.
However, the Production Technologies segment results
showed a decline in revenue of 8% and continuing negative
margins when comparing the second and first quarters of 2016.
Therefore, the Company completed testing for impairment of
the Production Technologies
long-lived assets within
the
indicated
segment. The
undiscounted estimated cash flows for the segment exceeded
the carrying value of assets by $4.4 million, or an excess of
34%. As a result, no impairment of long-lived assets was
recognized for the Production Technologies segment.
recoverability
that
test
During the third quarter of 2016, the average U.S. drilling rig
count rose 14% versus the second quarter of 2016. The Drilling
Technologies segment revenue increased 13% and improved
margins when comparing the third and second quarters of
2016, while the Production Technologies segment results
showed an increase in revenue of 15% and improved margins
when comparing the third and second quarters of 2016. As
such, the Company determined that testing for impairment of
long-lived assets was not warranted for either segment.
During the fourth quarter of 2016, the average U.S. drilling
rig count rose 23% versus the third quarter of 2016. The
Drilling Technologies segment revenue increased 6% and
showed slightly lower margins when compared to the third
quarter of 2016 but still exceeded second quarter 2016
margins. The Production Technologies segment results
showed an increase in revenue of 5% and improved margins
when comparing the fourth and third quarters of 2016. As such,
the Company determined that testing for impairment of long-
lived assets was not warranted for either segment.
Key assumptions and estimates used in performing these
recoverability tests were based on experience of the
Company’s management, experience with past oil and gas
industry downturns and recoveries, and internal, as well as
published external, perspectives of recovery timing. Key
assumptions used in the recoverability test included:
• Rental tools are the primary cash generating assets
for each group;
• Remaining estimated useful life for each group was
determined to be 7 years;
• Carrying amount of the asset group is the net book
value of the assets as of March 31, 2016, for first
38
quarter testing and June 30, 2016, for second quarter
testing;
• Estimates of future cash flows for the group assumed
the sale of the group at the end of the remaining useful
life of the primary asset; and
•
Since the Downhole Tools asset group includes
product sales in the cash flow analysis, a portion of
the inventory was included in the carrying amount of
the asset group. The remaining portion of the
inventory is normally utilized to repair and fabricate
rental tools and is included in cost of goods sold.
During the second quarter of 2015, as a result of decreased rig
activity and its impact on management’s expectations for
future market activity, the Company refocused the Drilling
Technologies segment to businesses and markets that have the
best opportunity for profitable growth in the future.
Additionally, the Company shifted the focus of the Production
Technologies segment towards oil production markets and
away from the less opportunistic CBM markets. As a result of
these changes in focus and projected declines in asset
utilization, the Company recorded impairment charges for
inventory ($18.0 million) and rental equipment ($2.3 million)
in the second quarter of 2015. Additionally, an assessment was
made regarding possible impairment of property and
equipment for (a) the Drilling Technologies asset group and
(b) the Production Technologies asset group.
An analysis of the Drilling Technologies asset group showed
that discounted future cash flows exceeded the carrying
amount of this asset group. In addition, projected future cash
flows considering only rental tools would exceed the carrying
amount of this asset group in approximately six years. These
preliminary analyses clearly indicated that the carrying
amount of property and equipment would be recoverable and
therefore, the Company did not perform an undiscounted
future cash flow analysis for this asset group.
An analysis of the Production Technologies asset group
showed that projected future cash flows from two recently
introduced products significantly exceeded the carrying
amount of this asset group. This preliminary analysis clearly
indicated that the carrying amount of property and equipment
would be recoverable and therefore, the Company did not
perform a more complete analysis of undiscounted future cash
flows for this asset group.
There are significant inherent uncertainties and judgments
involved in estimating fair value. A further extension or
deepening of the industry downturn could have a negative
impact on the cash flow analysis.
The Company cannot predict the occurrence of events or
circumstances that could adversely affect the fair value of the
asset (asset group). 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, additional impairment of long-lived assets
could be required.
In 2016, 2015, and 2014, while testing annual indefinite lived
intangible assets for impairment, the Company first assessed
qualitative factors to determine whether it was necessary to
perform the impairment test. Based on its qualitative
assessment, the Company concluded there was no indication
of the need for an impairment of indefinite lived intangibles,
and therefore no further testing was required.
No impairment was recorded for property and equipment and
intangible assets with determinable or indefinite lives during
2014.
Fair Value Measurements
Fair value is defined as the amount that would be received for
the sale of an asset or paid for the transfer of a liability in an
orderly transaction between unrelated third party market
participants at the measurement date. In determination of fair
value measurements for assets and liabilities, the Company
considers the principal, or most 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
The Company’s tax provision is subject to 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
jurisdictions in which the Company operates. The Company’s
income tax expense will fluctuate from year to year as the
amount of pretax income fluctuates. Changes in tax laws and
the Company’s profitability within and across the jurisdictions
may impact the Company’s tax liability. While the annual tax
provision is based on the best information available to the
Company at the time of preparation, several years may elapse
before the ultimate tax liabilities are determined.
The Company uses the liability method in accounting for
income taxes. Deferred tax assets and liabilities are
recognized for temporary differences between financial
statement carrying amounts and the tax bases of assets and
liabilities and are measured using the tax rates expected to be
in effect when the differences reverse. Deferred tax assets are
also recognized for operating loss and tax credit carry
forwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation
allowance is used to reduce deferred tax assets when
uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously
recorded tax assets when it becomes more likely than not such
assets will not be realized. The Company evaluates, at least
annually, net operating loss carry forwards and other net
deferred tax assets and considers all available 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 as significant negative 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
indicative of future
items not
adjusting for certain
performance. Based on this analysis, the Company determines
whether a valuation allowance is necessary.
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, 2016, the Company
performed an evaluation of its various tax positions 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.
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 model requires the input of highly
subjective assumptions, including expected stock 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
39
estimate, stock-based compensation expense is adjusted
accordingly.
Loss Contingencies
The Company is subject to a variety of loss contingencies that
could arise during the Company’s conduct of business.
Management considers the likelihood of a loss or impairment
of an asset or the incurrence of a liability, as well as the
Company’s ability to reasonably estimate the amount of loss,
in determining potential 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 amount
of loss can be reasonably estimated. Accruals for loss
contingencies have not been recorded during the past three
years. The Company regularly evaluates current information
available to determine whether such accruals should be made
or adjusted.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the
Company are described in Note 2 – “Summary of Significant
in Part II, Item 8 – “Financial
Accounting Policies”
Statements and Supplementary Data” of this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
The Company is exposed to market risk from changes in
interest rates, foreign currency exchange rates, and
commodity prices. Market risk is measured as the potential
negative impact on earnings, cash flows, or fair values
resulting from a hypothetical change in interest rates,
commodity prices, or foreign currency exchange rates over
the next year. The Company manages exposure to market risks
at the corporate level. The portfolio of interest-sensitive assets
and liabilities is monitored and adjusted to provide liquidity
necessary to satisfy anticipated short-term needs. The
Company’s risk management policies allow the use of
specified financial instruments for hedging purposes only.
Speculation on interest rates or foreign currency rates is not
permitted. The Company does not consider any of these risk
management activities to be material.
Interest Rate Risk
The Company is exposed to the impact of interest rate changes
on any outstanding indebtedness under the revolving credit
facility agreement and the term loan agreement both of which
have a variable interest rate. The interest rate on advances
under the revolving credit facility varies based on the level of
borrowing under the revolving credit facility. Rates range (a)
between PNC Bank’s base lending rate plus 1.5% to 2.0% or
(b) between the London Interbank Offered Rate (LIBOR) plus
2.5% to 3.0%. PNC Bank’s base lending rate was 3.75% at
December 31, 2016, and would have permitted borrowing at
rates ranging between 5.25% and 5.75%. 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, 2016, $38.6 million was outstanding under the
revolving credit facility, with $5.6 million borrowed as base
rate loans at an interest rate of 5.75% and $33.0 million
borrowed as LIBOR loans at an interest rate of 3.62%.
The amount borrowed under the term loan was reset to $10.0
million as of September 30, 2016. Monthly principal
payments of $0.2 million are required. The unpaid balance of
the term loan is due May 10, 2020. The interest rate on the
term loan varies based on the fixed charge coverage ratio.
Rates range (a) between PNC Bank’s base lending rate plus
40
2.25% to 2.75% or (b) between LIBOR plus 3.25% to 3.75%.
At December 31, 2016, $9.8 million was outstanding under
the term loan, with $0.8 million borrowed as base rate loans
at an interest rate of 6.50% and $9.0 million borrowed as
LIBOR loans at an interest rate of 4.37%.
Foreign Currency Exchange Risk
The Company presently has limited exposure to foreign
currency risk. During 2016, approximately 1.9% of revenue
was demarcated in non-U.S. dollar currencies and virtually all
assets and liabilities of the Company are denominated in U.S.
dollars. However, as the Company expands its international
operations, non-U.S. 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 raw
material feedstock cost to increase. The Company believes
that adequate global supply is available to meet the Company’s
needs and the needs of general chemistry markets at this time.
The Company primarily 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.
The Company purchased IPI in July 2016, an importer and
processor of guar splits into fast hydrating guar powder at its
facility in Dalton, Georgia. Guar powder is used as a gelling
agent for fluid systems in the completion of oil and gas wells.
Guar seed is largely produced in India and Pakistan and has
inherent commodity risk associated with agricultural crops
and geopolitical uncertainty. In recent years, the price of guar
has been disrupted by weak demand in the oil and gas industry,
causing prices to decline significantly from peak industry
activity in 2012. The Company believes its inventory and
supply agreements are well positioned to meet market needs
at this time. The Company primarily relies upon long-term
strategic supply relationships to meet its raw material needs
which are expected to remain in place for the foreseeable
future. Although there are international, publically traded
exchanges for guar seed, the Company presently does not have
any futures contracts and it does not plan to utilize these in the
foreseeable future.
41
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, 2016, 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.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded International
Polymerics, Inc. from its assessment of internal control over financial reporting as of December 31, 2016, because it was
acquired by the Company in a purchase business combination in the third quarter of 2016. We have also excluded International
Polymerics, Inc. from our audit of internal control over financial reporting. International Polymerics, Inc. is a wholly owned
subsidiary whose total assets and net income represent approximately 4% and 2%, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31, 2016.
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 limitations, 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.
In our opinion, Flotek Industries, Inc. maintained in all material respects, effective internal control over financial reporting as of
December 31, 2016, 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 as of December 31, 2016 and 2015, 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, 2016, and our report
dated February 8, 2017 expressed an unqualified opinion.
/s/ HEIN & ASSOCIATES LLP
Houston, Texas
February 8, 2017
42
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,
2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2016, 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, 2016, 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 February 8, 2017 expressed an unqualified opinion on the effectiveness of Flotek Industries, Inc.’s
internal control over financial reporting.
/s/ HEIN & ASSOCIATES LLP
Houston, Texas
February 8, 2017
43
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 $664 and
$709 at December 31, 2016 and 2015, respectively
Inventories
Deferred tax assets, net
Income taxes receivable
Assets held for sale
Other current assets
Total current assets
Property and equipment, net
Goodwill
Deferred tax assets, net
Other intangible assets, net
Assets held for sale
TOTAL ASSETS
Current liabilities:
LIABILITIES AND EQUITY
Accounts payable
Accrued liabilities
Income taxes payable
Interest payable
Liabilities held for sale
Current portion of long-term debt
Deferred tax liabilities, net
Total current liabilities
Long-term debt, less current portion
Deferred tax liabilities, net
Total liabilities
Commitments and contingencies
Equity:
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; 59,684,669
shares issued and 56,972,580 shares outstanding at December 31, 2016;
56,220,214 shares issued and 53,536,101 shares outstanding at
December 31, 2015
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Treasury stock, at cost; 2,028,847 and 1,784,897 shares at December 31, 2016
and 2015, respectively
Flotek Industries, Inc. stockholders’ equity
Noncontrolling interests
Total equity
TOTAL LIABILITIES AND EQUITY
December 31,
2016
2015
$
4,823
$
2,208
47,152
58,283
52
12,752
43,900
21,708
188,670
74,691
56,660
16,215
50,352
—
386,588
29,960
12,170
—
24
4,961
40,566
3,373
91,054
7,833
—
98,887
$
$
35,511
50,870
2,649
4,700
48,855
6,949
151,742
60,006
55,798
17,229
51,198
67,117
403,090
17,221
10,480
2,263
111
4,637
32,291
—
67,003
18,255
23,823
109,081
—
—
6
318,392
(956)
(9,830)
(20,269)
287,343
358
287,701
386,588
$
6
273,451
(1,237)
39,300
(17,869)
293,651
358
294,009
403,090
$
$
$
See accompanying Notes to Consolidated Financial Statements.
44
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenue
Cost of revenue
Gross profit
Expenses:
Selling, general and administrative
Depreciation and amortization
Research and development
Gain on disposal of long-lived assets
Total expenses
(Loss) income from operations
Other income (expense):
Interest expense
Gain on legal settlement
Other (expense) income, net
Total other income (expense)
Income before income taxes
Income tax expense
Income from continuing operations
(Loss) income from discontinued operations, net of tax
Net (loss) income
Basic earnings (loss) per common share:
Continuing operations
Discontinued operations, net of tax
Basic earnings (loss) per common share
Diluted earnings (loss) per common share:
Continuing operations
Discontinued operations, net of tax
Diluted earnings (loss) per common share
Weighted average common shares:
Year ended December 31,
2015
2014
2016
$
$
262,832
172,154
90,678
$
269,966
173,660
96,306
319,852
189,088
130,764
80,150
8,530
9,320
(18)
97,982
(7,304)
(1,979)
12,730
(303)
10,448
3,144
(1,237)
1,907
(51,037)
(49,130) $
$
0.03
(0.91)
(0.88) $
$
0.03
(0.91)
(0.88) $
70,276
7,108
6,657
(13)
84,028
12,278
(1,521)
—
(123)
(1,644)
10,634
(3,476)
7,158
(20,620)
(13,462) $
$
0.13
(0.38)
(0.25) $
$
0.13
(0.37)
(0.24) $
61,236
6,141
4,787
(19)
72,145
58,619
(1,373)
—
(376)
(1,749)
56,870
(17,248)
39,622
13,981
53,603
0.73
0.26
0.99
0.71
0.25
0.96
$
$
$
$
$
Weighted average common shares used in computing basic earnings
(loss) per common share
Weighted average common shares used in computing diluted earnings
(loss) per common share
56,087
54,459
54,511
56,350
54,992
55,526
See accompanying Notes to Consolidated Financial Statements.
45
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Income from continuing operations
(Loss) income from discontinued operations, net of tax
Net (loss) income
Other comprehensive income (loss):
Foreign currency translation adjustment
Comprehensive (loss) income
Year ended December 31,
2015
2014
2016
$
1,907
(51,037)
(49,130)
$
7,158
(20,620)
(13,462)
39,622
13,981
53,603
281
(48,849) $
(735)
(14,197) $
(143)
53,460
$
$
See accompanying Notes to Consolidated Financial Statements.
46
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, 2013
58,266
$
5,394
$ (15,176)
$
266,122
$
(359)
$
(841)
$
— $ 249,752
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
Balance, December 31, 2014
Net loss
Foreign currency translation adjustment
Stock issued under employee stock purchase plan
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 IAL acquisition
Repurchase of common stock
Balance, December 31, 2015
Net loss
Foreign currency translation adjustment
Sale of common stock, net of issuance cost
Stock issued under employee stock purchase plan
Stock options exercised
Restricted stock granted
Restricted stock forfeited
Treasury stock purchased
Stock surrendered for exercise of stock options
Reduction in tax benefit related to share-based awards
Stock compensation expense
Stock issued in IPI acquisition
Balance, December 31, 2016
6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
27
1,277
312
526
—
—
—
—
—
—
94
5
—
—
—
(43)
—
—
—
—
61
243
46
—
—
—
—
—
—
—
—
—
—
—
—
—
(6,294)
(1,198)
—
—
—
—
—
621
(10,395)
—
—
906
600
1,545
1,660
—
—
—
—
3,448
10,476
—
1,894
149
—
—
(143)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
53,603
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
351
—
—
—
—
53,603
(143)
906
600
1,545
1,660
—
—
(6,294)
(1,198)
3,448
10,476
351
1,894
149
(10,395)
—
(5,873)
(1)
(5,873)
32,568
(32,567)
54,634
$
—
—
—
768
758
—
—
—
—
—
—
60
—
56,220
$
—
—
2,450
—
114
653
—
—
—
—
—
248
59,685
$
5
—
—
—
1
—
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
—
—
—
—
—
6
449
$
(495)
$
254,233
$
(502)
$
52,762
$
351
$ 306,354
—
—
(77)
—
—
33
473
107
—
—
—
—
—
—
—
—
—
—
(6,345)
(1,332)
—
—
—
—
800
(9,697)
—
—
879
1,371
—
—
—
—
1,273
14,681
—
1,014
—
—
(735)
—
—
—
—
—
—
—
—
—
—
—
(13,462)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7
—
—
(13,462)
(735)
879
1,372
—
—
(6,345)
(1,332)
1,273
14,681
7
1,014
(9,697)
1,785
$ (17,869)
$
273,451
$
(1,237)
$
39,300
$
358
$ 294,009
—
—
—
(93)
—
—
96
—
—
—
—
—
—
—
238
(2,350)
3
—
—
—
(50)
—
—
—
—
—
30,090
833
184
—
—
—
—
(2,510)
13,076
3,268
—
281
—
—
—
—
—
—
—
—
—
—
(49,130)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(49,130)
281
30,090
833
184
—
—
(2,350)
(50)
(2,510)
13,076
3,268
2,029
$ (20,269)
$
318,392
$
(956)
$
(9,830)
$
358
$ 287,701
See accompanying Notes to Consolidated Financial Statements.
47
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2015
2014
2016
Cash flows from operating activities:
Net (loss) income
(Loss) income from discontinued operations, net of tax
Income from continuing operations
Adjustments to reconcile income from continuing operations to net cash provided by operating
activities:
Depreciation and amortization
Amortization of deferred financing costs
Provision for doubtful accounts
Provision for inventory reserves and market adjustments
Gain on sale of assets
Stock compensation expense
Deferred income tax (benefit) provision
Reduction in (excess) tax benefit related to share-based awards
Changes in current assets and liabilities:
Accounts receivable
Inventories
Income taxes receivable
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
Borrowings on revolving credit facility
Repayments on revolving credit facility
Debt issuance costs
(Reduction in) 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 provided by (used in) financing activities
Discontinued operations:
Net cash provided by operating activities
Net cash used in investing activities
Net cash flows used in discontinued operations
Effect of changes in exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$ (49,130) $ (13,462) $
(51,037)
1,907
(20,620)
7,158
53,603
13,981
39,622
10,429
424
558
—
(18)
12,053
(19,681)
2,510
(11,544)
(6,528)
(8,189)
(14,489)
12,653
23,946
(1,890)
(87)
2,054
(13,960)
115
(7,863)
(573)
(22,281)
(15,564)
338,460
(325,043)
(1,199)
(2,510)
(2,350)
30,923
—
134
—
—
22,851
8,735
346
367
—
(12)
13,083
(7,929)
(1,273)
13,676
(9,905)
(4,700)
167
(7,653)
9,552
3,842
18
25,472
(16,391)
13
—
(627)
(17,005)
(10,143)
382,666
(366,018)
(10)
1,273
(6,345)
879
(9,697)
39
—
7
(7,349)
7,713
343
50
10
60
9,123
1,502
(3,448)
(7,737)
(14,067)
—
(22,673)
10,954
19,824
1,386
(18)
42,644
(9,339)
59
(5,704)
(676)
(15,660)
(10,292)
357,183
(364,955)
(399)
3,448
(6,294)
906
(10,395)
462
1,545
351
(28,440)
12
(18)
(6)
(3)
2,615
2,208
4,823
$
1,199
(1,199)
—
(176)
942
1,266
2,208
$
6,043
(6,043)
—
(8)
(1,464)
2,730
1,266
$
See accompanying Notes to Consolidated Financial Statements.
48
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 company that develops and
supplies chemistry and services to the oil and gas 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 business
includes specialty
chemistries and logistics which enable its customers in
pursuing improved efficiencies in the drilling and completion
of their wells. The Company also provides automated bulk
material handling, loading facilities, and blending capabilities.
The Company processes citrus oil to produce (1) high value
compounds used as additives by companies in the flavors and
friendly
fragrances markets and
chemistries for use in numerous industries around the world,
including the oil and gas (“O&G”) industry.
(2) environmentally
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements have been
prepared in accordance with the accounting principles
generally accepted in the United States of America (“U.S.
GAAP”).
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, results of the
business operations are consolidated within the Company’s
financial statements. The ownership interests held by other
parties are shown as noncontrolling interests.
During the fourth quarter of 2016, the Company classified the
Drilling Technologies and Production Technologies segments
as held for sale based on management’s intention to sell these
businesses. The Company’s historical financial statements
have been revised to present the operating results of the
Drilling Technologies and Production Technologies segments
as discontinued operations. The results of operations of
Drilling Technologies and Production Technologies are
presented as “Loss from discontinued operations” in the
statement of operations and the related cash flows of these
segments has been reclassified to discontinued operations for
all periods presented. The assets and liabilities of the Drilling
Technologies and Production Technologies segments have
been reclassified to “Assets held for sale” and “Liabilities held
for sale”, respectively, in the consolidated balance sheets for
all periods presented.
Flotek operates in over 20 domestic and international markets.
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.
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.
All significant intercompany accounts and transactions have
been eliminated in consolidation. The Company does not have
investments in any unconsolidated subsidiaries.
Cash Equivalents
Cash equivalents consist of highly liquid investments with
maturities of three months or less at the date of purchase.
Cash Management
The Company uses a controlled disbursement account for its
main cash account. Under this system, outstanding checks can
be in excess of the cash balances at the bank before the
disbursement account is funded, creating a book overdraft.
Book overdrafts on this account are presented as a current
liability in accounts payable in the consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable arise from product sales and services and
are stated at estimated net realizable value. This value
incorporates an allowance for doubtful accounts to reflect any
loss anticipated on accounts receivable balances. The
Company regularly evaluates its accounts receivable to
estimate amounts that will not be collected and records the
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
customer circumstances, credit conditions, and historical
write-offs and collections. The Company writes off specific
accounts receivable when they are determined to be
uncollectible.
49
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The majority of the Company’s customers are engaged in the
energy industry. The cyclical nature of the energy industry may
affect customers’ operating performance and cash flows,
which directly impact the Company’s ability to collect on
outstanding obligations. Additionally, certain 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.
Changes in the allowance for doubtful accounts for continuing operations are as follows (in thousands):
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 exceeds
current market prices and impairs the cost basis of the
inventory accordingly. Historically, the Company recorded a
provision for excess and obsolete 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.
At December 31, 2016 and 2015, the Company recorded an
impairment for all inventory items identified as excess and
obsolete inventory.
Property and Equipment
Property and equipment are stated at cost. The cost of ordinary
maintenance and repair is charged to 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:
Buildings and leasehold improvements
Machinery, equipment, and rental tools
Furniture and fixtures
Transportation equipment
Computer equipment and software
2-30 years
7-10 years
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
50
Year ended December 31,
2015
2014
2016
$
$
709
558
(603)
664
$
$
510
367
(168)
709
$
$
548
50
(88)
510
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.
Internal Use Computer Software Costs
Direct costs incurred to purchase and develop computer
software for internal use are capitalized during the application
development 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
$5.7 million at December 31, 2016.
Goodwill
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 is not subject
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 a potential
impairment. These circumstances may include an adverse
change in the business climate or a change in the assessment
of future operations of a reporting unit.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company assesses whether a goodwill impairment exists
using both qualitative and quantitative assessments. The
qualitative assessment involves determining whether events
or circumstances exist that indicate it is more likely than not
that the fair value of a reporting unit is less than its carrying
amount, including goodwill. If, based on this qualitative
assessment, it 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.
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.
The first step is to compare the estimated fair value of each
reporting unit with goodwill to its carrying amount, including
goodwill. To determine fair value estimates, the Company uses
the income approach based on discounted cash flow analyses,
combined, when appropriate, 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 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, 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 events or changes in circumstances indicate the
carrying value may not be recoverable. These conditions may
include a change in the extent or manner in which the asset is
being used or a change in future operations. The Company
assesses the recoverability of the carrying amount by preparing
estimates of future revenue, margins, and cash flows. If the
sum of expected future cash flows (undiscounted and without
loss
interest charges) is less than the carrying amount, an
impairment
loss
is recognized. The
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.
impairment
Intangible assets with indefinite lives are not subject to
amortization, but are tested 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.
The Company assesses whether an indefinite lived intangible
impairment exists using both qualitative and quantitative
assessments. The qualitative assessment involves determining
whether events or circumstances exist that indicate it is more
likely than not that the fair value of the indefinite lived
intangible is less than its carrying amount. If, based on this
qualitative assessment, it is determined that it is not more likely
than not that the fair value of the indefinite lived intangible is
less than its carrying amount, the Company does not perform
a quantitative assessment.
If the qualitative assessment indicates that it is more likely
than not that the indefinite-lived intangible asset is impaired
or if the Company elects to not perform a qualitative
assessment, the Company then performs the quantitative
impairment test. The quantitative impairment test for an
indefinite-lived intangible asset consists of a comparison of
the fair 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.
Business Combinations
The Company includes the results of operations of its
acquisitions in its consolidated results, prospectively from the
date of acquisition. Acquisitions are accounted for by applying
the acquisitions method. 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 value of the acquired
assembled workforce. Acquisition-related expenses are
recognized separately from the business acquisition and are
recognized as expenses as incurred.
51
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
to unobservable
The Company categorizes financial assets and liabilities using
a three-tier fair value hierarchy, based on the nature of the
inputs used to determine fair value. Inputs refer broadly to
assumptions market participants would use to value an asset
or liability and may be observable or unobservable. The
hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (level 1) and the lowest
inputs (level 3). “Level 1”
priority
measurements are measurements using quoted prices in active
markets for identical assets and liabilities. “Level 2”
measurements are measurements using quoted prices in
markets that are not active or that are based on quoted prices
for similar assets or liabilities. “Level 3” measurements are
measurements that use significant unobservable inputs which
require a company to develop its own assumptions. When
determining the fair value of assets and liabilities, the
Company uses the most reliable measurement available.
Revenue Recognition
Revenue for product sales and services is recognized when all
of the following criteria have been met: (i) persuasive evidence
of an arrangement exists, (ii) products are shipped or services
are 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.
For certain contracts related to the EOGA division and the
Logistics division of the Energy Chemistry Technologies
segment, the Company recognizes revenue under the
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.
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
Financial statements of foreign subsidiaries are prepared using
the currency of the primary economic environment of the
foreign subsidiaries as the functional currency. Assets and
liabilities of foreign subsidiaries are translated into U.S.
dollars at exchange rates in effect as of the end of identified
reporting periods. Revenue and expense transactions are
translated using the average monthly exchange rate for the
reporting period. Resultant translation adjustments are
recognized as other comprehensive income (loss) within
stockholders’ equity.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in
stockholders’ equity, except those arising from investments
from and distributions to stockholders. The Company’s
comprehensive income (loss) includes net income (loss) and
foreign currency translation adjustments.
Research and Development Costs
Expenditures for research activities relating to product
development and improvement are charged to expense as
incurred.
Income Taxes
The Company had two U.S. tax filing groups which filed
separate U.S. Federal tax returns. Taxable income of one return
could not be offset by tax attributes, including net operating
losses, of the other return. During the year ended December
31, 2015, the Company restructured its legal entities such that
there is only one U.S. tax filing group filing a single U.S.
consolidated federal income tax return beginning in 2016.
The Company uses the liability method in accounting for
income taxes. Deferred tax assets and liabilities are recognized
for temporary differences between financial statement
carrying amounts and the tax bases of assets and liabilities and
are measured using the tax rates expected to be in effect when
the differences reverse. Deferred tax assets and liabilities are
recognized related to the anticipated future tax effects of
temporary differences between the financial statement basis
and the tax basis of the Company’s assets and liabilities using
statutory tax rates at the applicable year end. Deferred tax
assets are also recognized for operating loss and tax credit
carry forwards. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation
allowance is used to reduce deferred tax assets when
uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously
recorded tax assets when it becomes more likely than not that
such assets will not be realized. The Company evaluates, at
52
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as significant negative 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
indicative of future
items not
adjusting for certain
performance. Based on this analysis, the Company determines
whether a valuation allowance is necessary.
intention
the Company’s
U.S. Federal income taxes are not provided on unremitted
earnings of subsidiaries operating outside the U.S. because it
is
to permanently reinvest
undistributed earnings in the subsidiary. These earnings would
become subject to income tax if they were remitted as
dividends or loaned to a U.S. affiliate. Determination of the
amount of unrecognized deferred U.S. income tax liability on
these unremitted earnings is not practicable.
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 (Loss) Per Share
Basic earnings (loss) per common share is calculated by
dividing net income (loss) available to common stockholders
by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share is
calculated by dividing net income (loss) attributable 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 equivalents, if
the effect 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.
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.
53
Capitalization of Interest
Interest costs are capitalized for qualifying in-process software
development projects. Capitalization of interest commences
when activities to prepare the asset are in progress and
expenditures and borrowing costs are being incurred. Interest
costs are capitalized until the 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.
Stock-Based Compensation
Stock-based compensation expense for share-based payments,
related to stock option and restricted stock awards, is
recognized based on their grant-date fair values. The Company
recognizes 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
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and
reported amounts of revenue and expenses. Actual results
could differ from these estimates.
Significant items subject to estimates and assumptions include
application of the percentage-of-completion method of
revenue recognition, the carrying amount and useful lives of
property and equipment and intangible assets, impairment
assessments, share-based compensation expense, and
valuation allowances for accounts receivable, inventories, and
deferred tax assets.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the
period in which all of the following criteria are met: (1)
management, having the authority to approve the action,
commits to a plan to sell the disposal group; (2) the disposal
group is available for immediate sale in its present condition
subject only to terms that are usual and customary for sales of
such disposal groups; (3) an active program to locate a buyer
or buyers and other actions required to complete the plan to
sell the disposal group have been initiated; (4) the sale of the
disposal group is probable, and transfer of the disposal group
is expected to qualify for recognition as a completed sale,
within one year, except if events of circumstances beyond the
Company’s control extend the period of time required to sell
the disposal group beyond one year; (5) the disposal group is
being actively marketed for sale at a price that is reasonable
in relation to its current fair value; and (6) actions required to
complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be
withdrawn.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A disposal group that is classified as held for sale is initially
measured at the lower of its carrying value or fair value less
any costs to sell. Any loss resulting from this measurement is
recognized in the period in which the held for sale criteria are
met.
Subsequent changes in the fair value of a disposal group less
any costs to sell are reported as an adjustment to the carrying
value of the disposal group, as long as the new carrying value
does not exceed the carrying value of the asset at the time it
was initially classified as held for sale. Upon determining that
a disposal group meets the criteria to be classified as held for
sale, the Company reports the assets and liabilities of the
disposal group for all periods presented in the line items assets
held for sale and liabilities held for sale, respectively, in the
consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that
can be clearly distinguished, operationally and for financial
reporting purposes, that either has been disposed of or is
classified as held for sale is reported in discontinued
operations, if the disposal represents a strategic shift that has,
or will have, a major effect on the Company’s operations and
financial results.
General corporate overhead is not allocated to discontinued
operations for all periods presented. Interest expense on debt
required to be repaid as a result of disposal transactions is
allocated to discontinued operations. Interest allocated to
discontinued operations totaled $0.4 million, $0.2 million, and
$0.2 million for the years ended December 31, 2016, 2015,
and 2014, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform
to the current year presentation. The reclassifications did not
impact net income.
New Accounting Pronouncements
(a) Application of New Accounting Standards
Effective January 1, 2016, the Company adopted the
accounting guidance
in Accounting Standards Update
(“ASU”) No. 2015-01, “Simplifying Income Statement
Presentation by Eliminating the Concept of Extraordinary
Items.” This ASU eliminates from U.S. GAAP the concept of
extraordinary items and the need for an entity to separately
classify, present, and disclose extraordinary events and
transactions, while retaining certain presentation and
disclosure guidance for items that are unusual in nature or
occur infrequently. Implementation of this standard did not
have a material effect on the consolidated financial statements
and related disclosures.
Effective January 1, 2016, the Company adopted the
accounting guidance in ASU No. 2015-02, “Amendments to
54
the Consolidation Analysis.” The amendment eliminates the
deferral of certain consolidation standards for entities
considered to be investment companies and modifies the
consolidation analysis performed on certain types of legal
entities. Implementation of this standard did not have a
material effect on the consolidated financial statements and
related disclosures.
Effective January 1, 2016, the Company adopted the
accounting guidance in ASU No. 2015-03, “Simplifying the
Presentation of Debt Issuance Costs.” The accounting
guidance requires that debt issuance costs related to a
recognized debt liability be reported on the Consolidated
Statements of Financial Condition as a direct deduction from
the carrying amount of that debt liability. In addition, the
Company adopted the accounting guidance in ASU No.
2015-15, which provides additional guidance related to the
presentation or subsequent measurement of debt issuance
costs related to line-of-credit arrangements. An entity may
present debt issuance costs as an asset and subsequently
amortize the deferred debt issuance costs ratably over the term
of the line-of-credit arrangement, regardless of whether there
are any outstanding borrowings. Implementation of these
standards did not have a material effect on the consolidated
financial statements and related disclosures.
Effective January 1, 2016, the Company adopted the
accounting guidance in ASU No. 2015-16, “Simplifying the
Accounting for Measurement-Period Adjustments.” This
standard replaces the requirement that an acquirer in a business
combination account for measurement period adjustments
retrospectively with a requirement that an acquirer recognize
adjustments to the provisional amounts that are identified
during the measurement period in the reporting period in which
the adjustment amounts are determined. The acquirer is
required to record, in the same period’s financial statements,
the effect on earnings of changes in depreciation, amortization,
or other income effects, if any, as a result of the change to the
provisional amounts, calculated as if the accounting had been
completed at the acquisition date. The guidance is to be applied
prospectively to adjustments to provisional amounts that occur
after the effective date of the guidance. Implementation of this
standard did not have a material effect on the consolidated
financial statements and related disclosures.
(b) New Accounting Requirements and Disclosures
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued ASU No. 2014-09, “Revenue from Contracts
with Customers.” The ASU will supersede most of the existing
revenue 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
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with customers. In August 2015, the FASB issued ASU No.
2015-14, which deferred the effective date by one year to
annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. Early
adoption is permitted, but not before the original effective date
of reporting periods beginning after December 15, 2016. In
March 2016, the FASB issued ASU No. 2016-08, which
improves the operability and understandability of the
implementation guidance on principal versus agent
considerations. In April 2016, the FASB issued ASU No.
2016-10, which clarifies identifying performance obligations
and the licensing implementation guidance. In May 2016, the
FASB issued ASU No. 2016-11, which rescinds certain SEC
Staff Observer comments that are codified in Topic 605,
Revenue Recognition, effective upon adoption of ASU
2014-09, and ASU No. 2016-12, which reduces the potential
for diversity in practice at initial application and reduces the
cost and complexity of applying Topic 606 both at transition
and on an ongoing basis. In December 2016, the FASB issued
ASU No. 2016-20, which provides technical corrections and
improvements to the original guidance issued. The Company
intends to adopt the new standard in the first quarter of 2018
using the modified retrospective method. The Company has
identified key contract types representative of its business for
comparing historical accounting policies and practices to the
new standard and is continuing to evaluate the impact these
pronouncements will have on the consolidated financial
statements and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying
the Measurement of Inventory.” This standard requires
management to measure inventory at the lower of cost or net
realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation.
The pronouncement is effective for annual reporting periods
beginning after December 15, 2016, including interim periods
within
that reporting period and should be applied
retrospectively, with early application permitted. The
the
Company
pronouncement will have on the consolidated financial
statements and related disclosures.
is currently evaluating
impact
the
In November 2015, the FASB issued ASU 2015-17, “Balance
Sheet Classification of Deferred Taxes.” This standard
eliminates the current requirement for organizations to present
deferred tax assets and liabilities as current and noncurrent in
a classified balance sheet. Instead, organizations will be
required to classify all deferred tax assets and liabilities as
noncurrent. The pronouncement is effective for annual
reporting periods beginning after December 15, 2016,
including interim periods within that reporting period. The
the
Company
pronouncement will have on the consolidated financial
statements and related disclosures.
is currently evaluating
impact
the
leases under previous U.S. GAAP.
In February 2016, the FASB issued ASU No. 2016-02,
“Leases.” This standard requires the recognition of lease assets
and lease liabilities by lessees for those leases classified as
operating
The
pronouncement is effective for annual reporting periods
beginning after December 15, 2018, including interim periods
within that reporting period and should be applied using a
modified retrospective
transition approach, with early
application permitted. The Company is currently evaluating
the impact the pronouncement will have on the consolidated
financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09,
to Employee Share-Based Payment
“Improvements
Accounting.” This standard simplifies several aspects of the
accounting for share-based payment transactions, including
the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash
flows. The pronouncement is effective for annual reporting
periods beginning after December 15, 2016, including interim
periods within those annual periods, with early adoption
permitted. The Company is currently evaluating the impact
the pronouncement will have on the consolidated financial
statements and related disclosures.
the
loss
incurred
In June 2016, the FASB issued ASU No. 2016-13,
“Measurement of Credit Losses on Financial Instruments.”
This standard replaces
impairment
methodology in current U.S. GAAP with a methodology that
reflects expected credit losses and requires consideration of a
broader range of reasonable and supportable information to
inform credit loss estimates. The pronouncement is effective
for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years, with early adoption
for the fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. The
Company
the
pronouncement will have on the consolidated financial
statements and related disclosures.
is currently evaluating
impact
the
In August 2016, the FASB issued ASU No. 2016-15,
“Classification of Certain Cash Receipts and Cash Payments.”
This standard addresses eight specific cash flow issues with
the objective of reducing the existing diversity in practice. The
pronouncement is effective for fiscal years beginning after
December 15, 2017, including interim periods within those
fiscal years, with early adoption permitted. The Company is
currently evaluating the impact the pronouncement will have
the consolidated financial statements and related
on
disclosures.
In October 2016, the FASB issued ASU No. 2016-16, “Intra-
Entity Transfers of Assets Other Than Inventory.” This
standard requires the income tax consequences of an intra-
entity transfer of an asset other than inventory to be recognized
55
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
when the transfer occurs, instead of when the asset is sold to
an outside party. The pronouncement is effective for annual
reporting periods beginning after December 15, 2017,
including interim reporting periods within those annual
Note 3 — Discontinued Operations
During the fourth quarter 2016, the Company initiated a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry. The Company is executing a plan to sell
or otherwise dispose of the Drilling Technologies and
Production Technologies segments. An investment banking
advisory services firm has been engaged and is actively
marketing these segments.
The Company met all of the criteria to classify the Drilling
Technologies and Production Technologies segments’ assets
and liabilities as held for sale in the fourth quarter 2016.
Effective December 31, 2016, the Company has classified the
assets, liabilities, and results of operations for these two
reporting periods, with early adoption permitted. The
Company
the
pronouncement will have on the consolidated financial
statements and related disclosures.
is currently evaluating
impact
the
segments as “Discontinued Operations” for all periods
presented.
Disposal of the Drilling Technologies and Production
Technologies reporting segments represents a strategic shift
that will have a major effect on the Company’s operations and
financial results. These segments are available for immediate
sale in their present condition, subject only to usual and
customary terms, and management expects sales to be
completed by the end of 2017.
On December 30, 2016, the Company sold a portion of its
Drilling Technologies segment and recorded a loss of
$1,199,000 which is included in the loss from discontinued
operations for the year ended December 31, 2016.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued
Operations for the years ended December 31, 2016, 2015, and 2014 (in thousands):
Drilling Technologies
Production Technologies
2016
2015
2014
2016
2015
2014
$ 27,627
$ 52,112
$ 113,302
$
8,292
$ 12,281
$ 16,003
(18,667)
(35,410)
(67,651)
(15,285)
(21,049)
(22,870)
(7,881)
(3,790)
(10,179)
(4,158)
Discontinued operations:
Revenue
Cost of revenue
Selling, general and administrative
Depreciation and amortization
Research and development
Gain (loss) on disposal of long-lived assets
(1,714)
(3,240)
(3,343)
(64)
103
(202)
17
(172)
(244)
—
Impairment of inventory and long-lived assets
(36,522)
(19,568)
(Loss) income from operations
(44,522)
(27,340)
19,022
Other expense
Loss on sale of assets
Loss on write-down of assets held for sale
(412)
(1,199)
(18,971)
(259)
(227)
—
—
—
—
(584)
(888)
(50)
(3,913)
(8,814)
(96)
—
(6,161)
(658)
(596)
3
(804)
(4,111)
(40)
—
—
(9,459)
(3,040)
(254)
(17)
14
—
3,247
(28)
—
—
(Loss) income before income taxes
(65,104)
(27,599)
18,795
(15,071)
Income tax benefit (expense)
23,661
9,675
(6,858)
5,477
(4,151)
1,455
3,219
(1,175)
Net (loss) income from discontinued operations
$ (41,443) $ (17,924) $ 11,937
$
(9,594) $
(2,696) $
2,044
56
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assets and liabilities held for sale on the Consolidated Balance Sheets as of December 31, 2016 and 2015 are as follows (in
thousands):
Assets:
Accounts receivable, net
Inventories
Other current assets
Long-term receivable
Property and equipment, net
Goodwill
Other intangible assets, net
Assets held for sale
Valuation allowance
Assets held for sale, net
Liabilities:
Accounts payable
Accrued liabilities
Liabilities held for sale
Drilling Technologies
Production Technologies
December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015
$
$
$
$
5,072
9,078
278
—
11,277
15,333
7,395
48,433
(18,971)
29,462
2,472
1,190
3,662
$
$
$
$
$
7,712
22,388
315
—
27,837
15,333
17,648
91,233
—
91,233
1,441
1,897
3,338
$
$
$
1,784
8,115
370
4,179
3,978
1,689
484
20,599
(6,161)
14,438
914
385
1,299
$
$
$
$
5,974
12,234
232
—
4,070
1,689
540
24,739
—
24,739
782
517
1,299
Note 4 — Impairment of Inventory and Long-Lived
Assets for Discontinued Operations
During the three months ended March 31, 2016, as a result of
changes in the oil and gas industry that occurred since the
beginning of 2016 and the corresponding impact on the
Company’s business outlook, the Company evaluated the
direction of its business activities. Crude oil prices, which
appeared to have stabilized during the fourth quarter of 2015,
fell further during the first quarter of 2016, decreasing
approximately 21% from average prices seen in the fourth
quarter of 2015. The U.S. drilling rig count declined from 698
at December 31, 2015 to 450 at April 1, 2016, a decline of
35.5%.
Due to the decreased rig activity and its impact on
management’s expectations for future market activity, the
Company further refocused operations of its Drilling
Technologies segment. The Company decided to exit the
business of building and repairing motors in all domestic
markets. In addition, changes in drilling technique, including
further escalation of the move to a dominance of pad drilling,
reduced the marketability of certain other inventory items. The
focus of the Production Technologies segment is being shifted
to its new technologies for electric submersible pumps for the
oil and gas industry and for hydraulic pumping units. Inventory
associated with older technologies for these items has been
evaluated for impairment. As a result of these changes in focus
and projected declines in asset utilization, the Company
recorded a pre-tax impairment of inventories as noted below.
57
Changes in the business climate noted above and increasing
operating losses experienced within the Drilling Technologies
and Production Technologies segments during the three
months ended March 31, 2016, caused the Company to test
asset groups within these two segments for recoverability.
Recoverability of the carrying value of the asset groups was
based upon estimated future cash flows while taking into
consideration various assumptions and estimates, including
future use of the assets, remaining useful life of the assets, and
eventual disposition of the assets. Undiscounted estimated
cash flows of two asset groups associated with domestic
operations in the Drilling Technologies segment did not
exceed the carrying value of the respective asset groups.
Therefore, the Company performed an analysis of discounted
future cash flows to determine the fair value of each of these
two asset groups. As a result of this testing, the Company
recorded a pre-tax impairment of long-lived assets as noted
below.
In addition, during the three months ended June 30, 2015, as
a result of decreased rig activity and its impact on
management’s expectations for future market activity, the
Company refocused the Drilling Technologies segment to
businesses and markets that have the best opportunity for
profitable growth in the future. In addition, the Company
shifted the focus of the Production Technologies segment to
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
oil production markets and away from coal bed methane
markets. As a result of these changes in focus and projected
declines in asset utilization, the Company recorded pre-tax
impairment charges as noted below.
The Company recorded impairment charges during the three months ended March 31, 2016 and June 30, 2015, as follows (in
thousands):
Drilling Technologies:
Inventories
Long-lived assets:
Property and equipment
Intangible assets other than goodwill
Production Technologies:
Inventories
Total impairment
Three months ended
March 31, 2016
June 30, 2015
$
12,653
$
17,241
14,642
9,227
3,913
$
40,435
$
2,327
—
804
20,372
Based on the changes in the business climate discussed above and continuing operating losses experienced during the three months
ended March 31, 2016, June 30, 2016, September 30, 2016, and December 31, 2016, goodwill within the Teledrift and Production
Technologies reporting units was tested for impairment. However, no impairments of goodwill were recorded based upon this
testing.
Note 5 — Acquisitions
On July 27, 2016, the Company acquired 100% of the stock
and interests in International Polymerics, Inc. (“IPI”) and
related entities for $7.9 million in cash consideration, net of
cash acquired, and 247,764 shares of the Company’s common
stock. IPI is a U.S. based manufacturer of high viscosity guar
gum and guar slurry for the oil and gas industry with a wide
selection of stimulation chemicals.
On January 27, 2015, the Company acquired 100% of the
assets of International Artificial Lift, LLC (“IAL”) for $1.3
million in cash consideration and 60,024 shares of the
Company’s common stock. IAL, a development-stage
company at acquisition, specializes
the design,
manufacturing and service of next-generation hydraulic
pumping units that serve to increase and maximize production
for oil and natural gas wells. The assets, liabilities, and results
of operations of IAL are included in discontinued operations.
in
On April 1, 2014, the Company acquired 100% of the
membership interests in SiteLark, LLC (“SiteLark”) for $0.4
million in cash consideration and 5,327 shares of the
Company’s common stock. SiteLark provides reservoir
engineering and modeling services for a variety of
hydrocarbon applications. Its services include proprietary
software that assists engineers with reservoir simulation,
reservoir engineering and waterflood optimization.
interests
On January 1, 2014, the Company acquired 100% of the
membership
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.
58
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
Supplemental non-cash investing and financing activities:
Value of common stock issued in acquisitions
Final Florida Chemical acquisition adjustment
Value of common stock issued in payment of accrued liability
Exercise of stock options by common stock surrender
Supplemental cash payment information:
Interest paid
Income taxes paid, net of refunds
Note 7 — Revenue
Year ended December 31,
2015
2014
2016
$
$
$
3,268
—
—
50
$
1,014
—
—
1,332
2,043
1,162
600
1,198
$
2,024
333
$
1,398
1,547
1,285
22,389
The Company differentiates revenue and cost of revenue based on whether the source of revenue is attributable to products or
services. Revenue and cost of revenue by source are as follows (in thousands):
Revenue:
Products
Services
Cost of Revenue:
Products
Services
Depreciation
Year ended December 31,
2015
2014
2016
$
$
$
$
256,263
6,569
262,832
162,487
7,768
1,899
172,154
$
$
$
$
258,968
10,998
269,966
164,837
7,196
1,627
173,660
$
$
$
$
304,973
14,879
319,852
179,258
8,257
1,573
189,088
59
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Inventories
Inventories are as follows (in thousands):
Raw materials
Work-in-process
Finished goods
Inventories
December 31,
2016
2015
$
$
28,626
2,918
26,739
58,283
$
$
30,127
3,044
17,699
50,870
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
Balance, beginning of year
Charged to costs and expenses
Deductions
Balance, end of the year
Year ended December 31,
2015
2014
2016
$
$
— $
—
—
— $
— $
—
—
— $
98
10
(108)
—
At December 31, 2016 and 2015, the Company recorded an impairment for all inventory items identified as excess and obsolete
inventory.
Note 9 — 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
2016
2015
$
$
5,837
42,986
36,187
3,235
1,969
3,059
11,844
105,117
(30,426)
74,691
$
$
4,988
23,038
29,427
11,916
1,838
1,714
10,723
83,644
(23,638)
60,006
Depreciation expense, including expense recorded in cost of revenue, totaled $7.6 million, $5.8 million, and $4.7 million for the
years ended December 31, 2016, 2015, and 2014, respectively.
During the years ended December 31, 2016, 2015, and 2014, no impairments were recognized related to property and equipment.
60
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Goodwill
The Company has two reporting units, Energy Chemistry
Technologies and Consumer and Industrial Chemistry
Technologies, which have existing goodwill balances at
December 31, 2016.
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, 2016 and 2014,
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 2016 and
2014, and therefore, further testing was not required.
During annual goodwill impairment testing during the year
ended December 31, 2015, the Company assessed the
qualitative factors and concluded it was not more likely than
not that there was an impairment of goodwill for the Consumer
and Industrial Chemistry Technologies reporting unit.
However, the Company was not able to conclude that it was
not more likely than not that fair value of the Energy Chemistry
Technologies reporting unit exceeded its carrying value.
Therefore, the Company performed the Step 1 impairment test
for this reporting unit. The result of the Step 1 test indicated
that the fair value of the Energy Chemistry Technologies
reporting unit exceeded its carrying amount. Therefore, no
further testing was required for this reporting unit.
No impairments of goodwill were recognized during the years
ended December 31, 2016, 2015, and 2014.
Changes in the carrying value of goodwill for each reporting unit are as follows (in thousands):
Energy Chemistry
Technologies
Consumer and
Industrial Chemistry
Technologies
Total
$
36,318
$
—
36,318
19,480
$
—
19,480
Balance at December 31, 2014:
Goodwill
Accumulated impairment losses
Goodwill balance, net
Activity during the year 2015:
Goodwill impairment recognized
Acquisition goodwill recognized
Balance at December 31, 2015:
Goodwill
Accumulated impairment losses
Goodwill balance, net
Activity during the year 2016:
Goodwill impairment recognized
Acquisition goodwill recognized
Balance at December 31, 2016:
Goodwill
Accumulated impairment losses
Goodwill balance, net
$
55,798
—
55,798
—
—
55,798
—
55,798
—
862
56,660
—
56,660
—
—
36,318
—
36,318
—
862
—
—
19,480
—
19,480
—
—
37,180
—
37,180
$
19,480
—
19,480
$
61
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Other Intangible Assets
Other intangible assets are as follows (in thousands):
Finite lived intangible assets:
Patents and technology
Customer lists
Trademarks and brand names
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:
Other intangible assets, net
$
$
$
December 31,
2016
2015
Cost
Accumulated
Amortization
Cost
Accumulated
Amortization
3,461
4,904
925
9,290
858
10,148
$
$
16,815
30,877
1,467
49,159
1,804
50,963
11,630
62,593
50,352
4,537
6,518
1,069
12,124
117
12,241
$
$
$
$
$
16,544
30,467
1,040
48,051
1,665
49,716
11,630
61,346
51,198
Intangible assets acquired are amortized on a straight-line
basis over two to 20 years. Amortization of intangible assets
acquired totaled $2.8 million, $3.0 million, and $3.0 million
for the years end ended December 31, 2016, 2015, and 2014,
respectively.
Amortization of deferred financing costs totaled $0.4 million,
$0.3 million, and $0.3 million for the years ended
December 31, 2016, 2015, and 2014, respectively.
Estimated future amortization expense for other intangible assets, including deferred financing costs, at December 31, 2016 is as
follows (in thousands):
Year ending December 31,
2017
2018
2019
2020
2021
Thereafter
Other intangible assets, net
$
$
3,070
2,990
2,930
2,638
2,428
24,666
38,722
During the years ended December 31, 2016, 2015, and 2014, no impairments were recognized related to other intangible assets.
62
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — 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
December 31,
2016
2015
$
$
38,566
9,833
48,399
(40,566)
7,833
$
$
25,148
25,398
50,546
(32,291)
18,255
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 has total borrowing
availability of $65 million under a revolving credit facility and
a term loan.
The Credit Facility is secured by substantially all of the
Company’s domestic real and personal property, including
accounts receivable, inventory, land, buildings, equipment and
other intangible assets. The Credit Facility contains customary
representations, warranties, and both affirmative and negative
covenants. The Credit Facility restricts the payment of cash
dividends on common stock and limits the amount that may
be used to repurchase common stock and preferred stock. In
the event of default, PNC Bank may accelerate the maturity
date of any outstanding amounts borrowed under the Credit
Facility.
Effective September 30, 2016, the Company entered into a
Sixth Amendment to the Credit Facility which extended its
term by two years through May 10, 2020, and set total
borrowing capacity at $65 million. Initially, the Company (a)
may borrow up to $55 million under a revolving credit facility
and (b) has borrowed $10 million under a term loan. The
revolving credit facility limit will increase by each term loan
principal payment, therefore, total borrowing capacity will
remain at $65 million throughout the term of the Credit
Facility.
The Sixth Amendment to the Credit Facility contains financial
covenants to maintain a fixed charge coverage ratio and a
leverage ratio, as well as establishes an annual limit on capital
expenditures. The fixed charge coverage ratio is the ratio of
(a) adjusted earnings before interest, taxes, depreciation, and
amortization (“EBITDA”) less cash taxes paid during the
period to (b) all debt payments during such period. The fixed
63
charge coverage ratio requirement begins for the quarter
ending March 31, 2017 at 1.00 to 1.00 and increases to 1.10
to 1.00 for the year ending December 31, 2017, and thereafter.
The leverage ratio (funded debt to adjusted EBITDA)
requirement begins for the six months ending June 30, 2017
at not greater than 5.5 to 1.0 and reduces to not greater than
4.0 to 1.0 for the year ending March 31, 2018, and thereafter.
The annual limit on capital expenditures is $20 million. The
annual limit on capital expenditures is affected if the undrawn
availability of the revolving credit facility falls below $15
million at any month-end.
The Credit Facility includes a provision, effective beginning
in 2017, 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 on the
outstanding balance of the term loan within 60 days of the
fiscal year end.
Each of the Company’s domestic and foreign 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 initially
borrow up to $55 million through May 10, 2020. This includes
a sublimit of $10 million that may be used for letters of credit.
The revolving credit facility limit will increase by each term
principal payment. The revolving credit facility is secured by
substantially all of the Company’s domestic and Canadian
accounts receivable and inventory.
At December 31, 2016, eligible accounts receivable and
inventory securing the revolving credit facility provided total
borrowing capacity of $55.1 million under the revolving credit
facility. Available borrowing capacity, net of outstanding
borrowings, was $16.5 million at December 31, 2016.
The interest rate on advances under the revolving credit facility
varies based on the fixed charge coverage ratio. Rates range
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) between PNC Bank’s base lending rate plus 1.5% to 2.0%
or (b) between the London Interbank Offered Rate (LIBOR)
plus 2.5% to 3.0%. PNC Bank’s base lending rate was 3.75%
at December 31, 2016. The Company is required to pay a
monthly facility fee of 0.25% per annum, on any unused
amount under the commitment based on daily averages. At
December 31, 2016, $38.6 million was outstanding under the
revolving credit facility, with $5.6 million borrowed as base
rate loans at an interest rate of 5.75% and $33.0 million
borrowed as LIBOR loans at an interest rate of 3.62%.
Borrowing under the revolving credit facility is classified as
current debt as a result of the required lockbox arrangement
and the subjective acceleration clause.
(b) Term Loan
The amount borrowed under the term loan was reset to $10
million effective as of September 30, 2016. Monthly principal
payments of $0.2 million are required. The unpaid balance of
the term loan is due May 10, 2020. Prepayments are permitted,
and may be required in certain circumstances. Amounts
repaid under the term loan will be added to the borrowing
availability under the revolving credit facility. 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 fixed
charge coverage ratio. Rates range (a) between PNC Bank’s
base lending rate plus 2.25% to 2.75% or (b) between LIBOR
plus 3.25% to 3.75%. At December 31, 2016, $9.8 million
was outstanding under the term loan, with $0.8 million
borrowed as base rate loans at an interest rate of 6.50% and
$9.0 million borrowed as LIBOR loans at an interest rate of
4.37%.
Debt Maturities
Maturities of long-term debt at December 31, 2016, are as follows (in thousands):
Year ending
December 31,
2017
2018
2019
2020
Total
Revolving
Credit Facility
38,566
$
—
—
—
38,566
$
$
$
Term Loan
Total
2,000
2,000
2,000
3,833
9,833
$
$
40,566
2,000
2,000
3,833
48,399
Note 13 — Fair Value Measurements
Fair value is defined as the amount that would be received for
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date. The Company categorizes financial assets and liabilities
into the three levels of the fair value hierarchy. The hierarchy
prioritizes the inputs to valuation techniques used to measure
fair value and bases categorization within the hierarchy on the
lowest level of input that is available and significant to the fair
value measurement.
• 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 term of the assets
or liabilities; and
• Level 3 — Significant unobservable inputs that are
supported by little or no market activity or that are based
on the reporting entity’s assumptions about the inputs.
Liabilities Measured at Fair Value on a Recurring Basis
At December 31, 2016 and 2015, 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, Level 2, or Level 3 fair
value measurements during the years ended December 31,
2016, 2015, and 2014.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and
equipment, goodwill, and 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, 2016, 2015, and 2014.
64
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Other Financial Instruments
The carrying amounts of certain financial 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, 2016 or
2015.
The carrying value and estimated fair value of the Company’s long-term debt are as follows (in thousands):
December 31,
2016
2015
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Borrowings under revolving credit facility
Term loan
$
$
38,566
9,833
$
38,566
9,833
$
25,148
25,398
25,148
25,398
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 14 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by
dividing net income (loss) by the weighted average number of
common shares outstanding for the period. Diluted earnings
(loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common shares
outstanding combined with dilutive common
share
equivalents outstanding, if the effect is dilutive.
Basic and diluted earnings (loss) per common share are as follows (in thousands, except per share data):
Income from continuing operations
(Loss) income from discontinued operations, net of tax
Net (loss) income - Basic and Diluted
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
Weighted average common shares outstanding - Diluted
Basic earnings (loss) per common share:
Continuing operations
Discontinued operations, net of tax
Basic earnings (loss) per common share
Diluted earnings (loss) per common share:
Continuing operations
Discontinued operations, net of tax
Diluted earnings (loss) per common share
65
Year ended December 31,
2015
2014
2016
$
1,907
(51,037)
(49,130) $
$
7,158
(20,620)
(13,462) $
39,622
13,981
53,603
56,087
54,459
54,511
—
197
66
56,350
—
527
6
54,992
$
0.03
(0.91)
(0.88) $
$
0.03
(0.91)
(0.88) $
$
0.13
(0.38)
(0.25) $
$
0.13
(0.37)
(0.24) $
121
880
14
55,526
0.73
0.26
0.99
0.71
0.25
0.96
$
$
$
$
$
$
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Income Taxes
Components of the income tax expense (benefit) are as follows (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Income tax expense
Year ended December 31,
2015
2014
2016
$
$
$
442
(85)
(526)
(169)
1,564
(112)
(46)
1,406
1,237
$
3,944
390
1,841
6,175
(2,628)
(63)
(8)
(2,699)
3,476
$
$
19,150
(13)
242
19,379
(984)
(1,147)
—
(2,131)
17,248
The components of income before income taxes are as follows (in thousands):
United States
Foreign
Income before income taxes
Year ended December 31,
2015
2014
2016
$
$
4,502
(1,358)
3,144
$
$
4,760
5,874
10,634
$
$
56,729
141
56,870
A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:
Federal statutory tax rate
State income taxes, net of federal benefit
Non-U.S. income taxed at different rates
Return to accrual adjustments
Change in valuation allowance
Domestic production activities deduction
Net operating loss carryback adjustment
Other
Effective income tax rate
Year ended December 31,
2015
2014
2016
35.0%
(5.3)
1.2
(2.3)
0.3
—
10.0
0.4
39.3%
35.0%
2.0
(4.4)
(3.8)
0.1
—
1.4
2.4
32.7%
35.0%
(2.0)
—
(0.2)
—
(3.0)
—
0.5
30.3%
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax
impact and changes in state apportionment factors, including the effect on state deferred tax assets and liabilities. Changes in the
effective tax rate also included the benefit of non-U.S. income taxed at lower rates during 2015, and the Company not qualifying
for the domestic production activities deduction during 2016 and 2015. The benefit of operating in foreign tax jurisdictions is
primarily derived from operations in Canada.
66
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the tax effect of temporary differences between the carrying value of assets and liabilities for financial
reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the
differences reverse. The components of deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Allowance for doubtful accounts
Inventory valuation reserves
Equity compensation
Goodwill
Accrued compensation
Foreign tax credit carryforward
Other
Total gross deferred tax assets
Valuation allowance
Total deferred tax assets, net
Deferred tax liabilities:
Property and equipment
Intangible assets
Convertible debt
Unearned revenue
Prepaid insurance and other
Total gross deferred tax liabilities
Net deferred tax assets (liabilities)
Deferred taxes are presented in the balance sheets as follows (in thousands):
Current deferred tax assets
Non-current deferred tax assets
Current deferred tax liabilities
Non-current deferred tax liabilities
Net deferred tax (liabilities) assets
December 31,
2016
2015
$
21,212
1,582
2,205
3,161
10,788
80
2,365
76
41,469
(1,053)
40,416
(7,264)
(13,375)
(2,010)
(4,535)
(338)
(27,522)
12,894
$
15,210
432
3,734
4,250
6,869
73
865
67
31,500
(1,093)
30,407
(12,876)
(18,249)
(3,011)
—
(216)
(34,352)
(3,945)
December 31,
2016
2015
52
16,215
(3,373)
—
12,894
$
$
2,649
17,229
—
(23,823)
(3,945)
$
$
$
$
As of December 31, 2016, the Company had U.S. net operating
loss carryforwards of $55.4 million, expiring in various
amounts in 2028 through 2035. The ability to utilize net
operating losses and other tax attributes could be subject to a
significant limitation if the Company were to undergo an
“ownership change” for purposes of Section 382 of the Tax
Code.
During 2014 and 2015,
the Company’s corporate
organizational structure required the filing of two separate
consolidated U.S. Federal income tax returns. Taxable income
of one group (“Group A”) could not be offset by tax attributes,
including net operating losses of the other group (“Group B”).
During the year ended December 31, 2015, the Company
restructured its legal entities such that there is only one U.S.
tax filing group filing a single U.S. consolidated federal
income tax return beginning in 2016.
The Company considers all available evidence, both positive
and negative, to determine whether a valuation allowance is
necessary for deferred tax assets. 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. As of December 31,
2016, the Company maintains a valuation allowance of $1.1
million for deferred tax assets in certain state jurisdictions.
The Company has not calculated U.S. taxes on unremitted
earnings of certain non-U.S. subsidiaries due to the Company’s
intent to reinvest the unremitted earnings of the non-U.S.
subsidiaries. At December 31, 2016, the Company had
approximately $1.2 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
67
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remitted to the U.S. It is not practicable to estimate the amount
of the deferred tax liability on such unremitted earnings.
At December 31, 2016, the Company had no unrecognized tax
benefits.
The Company has performed an evaluation and concluded
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,
2016, which are the years ended December 31, 2013 through
December 31, 2016 for U.S. federal taxes and the years ended
December 31, 2012 through December 31, 2016 for state tax
jurisdictions.
In January 2017, the Internal Revenue Service notified the
Company that it will examine the Company’s federal tax
returns for the year ended December 31, 2014. No adjustments
have been asserted and management believes that sustained
adjustments, if any, would not have a material effect on the
Company’s financial position, results of operations or
liquidity.
Note 16 — Convertible Preferred Stock and Stock Warrants
In August 2009, the Company sold convertible preferred stock
with detachable warrants to purchase shares of the Company’s
common stock. In February 2011, the Company exercised its
contractual right to mandatorily convert all outstanding shares
of convertible preferred stock into shares of common stock.
Currently, the Company has no issued or outstanding shares
of preferred stock.
Note 17 — Common Stock
During the year ended December 31, 2014, warrants were
exercised to purchase 1,277,250 shares of the Company’s
common stock at $1.21 per share generating cash proceeds of
$1.5 million. 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 sale of common stock
Issued in acquisitions
Issued in payment of accrued liability
Issued as restricted stock award grants
Issued upon exercise of stock options
Shares issued at the end of the year
Year ended December 31,
2015
2016
56,220,214
2,450,339
247,764
20,000
632,240
114,112
59,684,669
54,633,726
—
60,024
—
758,904
767,560
56,220,214
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, and
2007 Plan are 5.2 million, 6.0 million, and 2.2 million,
respectively. At December 31, 2016, the Company had a total
of 1.8 million shares remaining to be granted under the 2014
Plan, 2010 Plan, and 2007 Plan. Shares may no longer be
granted under the 2005 Plan and 2003 Plan.
Stock Options
All stock options are granted with an exercise price equal to
the market value of the Company’s common stock on the date
of grant. Options expire no later than ten years from the date
of grant and generally vest in four years or less. Proceeds
received from stock option exercises are credited to common
stock and additional paid-in capital, as appropriate. The
68
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2016, 2015, and 2014.
The Black-Scholes option valuation model was developed to
estimate the fair value of traded options that have no vesting
restrictions and are fully-transferable. Because option
valuation models require the use of subjective assumptions,
changes in these assumptions can materially affect the fair
value calculation. The Company’s options are not
characteristic of traded options; therefore, the option valuation
models do not necessarily provide a reliable measure of the
fair value of options.
Stock option activity for the year ended December 31, 2016 is as follows:
Options
Outstanding as of January 1, 2016
Exercised
Forfeited
Expired
Outstanding as of December 31, 2016
Vested or expected to vest at
December 31, 2016
Options exercisable as of
December 31, 2016
Shares
777,400
(114,112)
—
—
663,288
663,288
663,288
$
$
$
$
Weighted-
Average
Exercise
Price
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic Value
7.80
1.62
—
—
8.87
8.87
8.87
0.42 $
348,067
0.42 $
348,067
0.42 $
348,067
The total intrinsic value of stock options exercised during the
years ended December 31, 2016, 2015, and 2014 was $1.0
million, $8.4 million, and $6.0 million, respectively. No stock
options vested during the year ended December 31, 2016. The
total fair value of stock options vesting during the year ended
December 31, 2014 was less than $0.1 million.
At December 31, 2016, 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 with terms
specified in the Restricted Stock Agreements (“RSAs”). Time-
vesting restricted shares vest after a stipulated period of time
has elapsed subsequent to the date of grant, generally three to
four years. Certain time-vested shares have also been issued
with a portion of the shares granted vesting immediately.
Performance-based
issued with
performance criteria defined over a designated performance
period and vest only when, and if, the outlined performance
criteria are met. During the year ended December 31, 2016,
approximately 41% of the restricted shares granted were time-
vesting and 59% were performance-based. Grantees of
restricted shares retain voting rights for the granted shares.
restricted shares are
69
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock share activity for the year ended December 31, 2016 is as follows:
Restricted Stock Shares
Non-vested at January 1, 2016
Granted to employees
Granted to service provider
RSAs converted from 2015 restricted stock units
Vested
Forfeited
Non-vested at December 31, 2016
Weighted-
Average Fair
Value at Date of
Grant
18.21
11.92
11.21
21.96
19.93
18.22
15.92
Shares
899,216
246,191
20,000
386,049
(772,267)
(95,947)
683,242
$
$
The weighted-average grant-date fair value of restricted stock
granted during the years ended December 31, 2016, 2015, and
2014 was $11.92, $16.15, and $27.29 per share, respectively.
The total fair value of restricted stock that vested during the
years ended December 31, 2016, 2015, and 2014 was $15.4
million, $13.7 million, and $10.2 million, respectively.
At December 31, 2016, there was $7.9 million of unrecognized
compensation expense related to non-vested restricted stock.
The unrecognized compensation expense is expected to be
recognized over a weighted-average period of 1.3 years.
Restricted Stock Units
During the year ended December 31, 2016, the Company
granted performance-based restricted stock units (“RSUs”) for
768,393 shares equivalents. The performance period for these
share equivalents continues until December 31, 2017.
Restricted stock unit share activity for the year ended December 31, 2016 is as follows:
Restricted Stock Unit Shares
RSU share equivalents at January 1, 2016
2015 RSUs converted to RSAs in 2016
Share equivalents granted in 2016
RSU share equivalents at December 31, 2016
Weighted-
Average Fair
Value at Date of
Grant
21.96
21.96
12.02
12.02
Shares
386,049
(386,049)
768,393
768,393
$
$
At December 31, 2016, there was $6.9 million of unrecognized
compensation expense related to 2016 restricted stock units.
The unrecognized compensation expense is expected to be
recognized over a weighted-average period of 2.0 years.
Employee Stock Purchase Plan
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. 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 $0.1 million, $0.2 million, and $0.2 million
during the years ended December 31, 2016, 2015, and 2014,
respectively. The total fair value of the shares purchased under
the plan during the years ended December 31, 2016, 2015, and
2014 was $1.0 million, $1.0 million, and $1.1 million,
respectively. The employee payment associated with
participation in the plan was satisfied through payroll
deductions.
Share-Based Compensation Expense
Non-cash share-based compensation expense related to stock
options, restricted stock, restricted stock unit grants, and stock
purchased under the Company’s ESPP was $12.1 million,
70
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$13.1 million, and $9.1 million during the years ended
December 31, 2016, 2015, and 2014, 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,
2016, 2015, and 2014, the Company purchased 238,216
shares, 473,304 shares, and 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, 2016, 2015, and 2014, shares surrendered
for the exercise of stock options were 3,225, 106,810, and
46,208, respectively. These surrendered shares are also
accounted for as treasury stock.
Retirement of Treasury Stock
On December 31, 2014, the Company retired 5,873,291 shares
of its treasury stock with an 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 were 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 stockholders’ equity.
Note 18 — Commitments and Contingencies
Class Action Litigation
In November 2015, four putative securities class action
lawsuits were filed in the United States District Court for the
Southern District of Texas against the Company and certain
of its officers. The lawsuits have been consolidated into a
single case, and an amended complaint has been filed. The
amended complaint asserts that the Company made false and/
or misleading statements, as well as failed to disclose material
adverse facts about the Company’s business, operations, and
prospects. The complaint seeks an award of damages in an
unspecified amount on behalf of a putative class consisting of
persons who purchased the Company’s common stock
between October 23, 2014 and November 9, 2015, inclusive.
In January 2016, three derivative lawsuits were filed, two in
the District Court of Harris County, Texas (which have since
been consolidated into one case), and one in the United States
District Court for the Southern District of Texas, on behalf of
the Company against certain of its officers and its current
directors. The lawsuits allege violations of law, breaches of
fiduciary duty, and unjust enrichment against the defendants.
Stock Repurchase Program
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 the
open market or through privately negotiated transactions.
During the year ended December 31, 2016, the Company did
not repurchase any shares of its outstanding common stock.
During the year ended December 31, 2015, the Company
repurchased 799,723 shares of its outstanding common stock
on the open market at a cost of $9.7 million, inclusive of
transaction costs, or an average price of $12.13 per share.
During the year ended December 31, 2014, the Company
repurchased 621,176 shares of its outstanding common stock
on the open market at a cost of $10.4 million, inclusive of
transaction costs, or an average price of $16.74 per share.
In June 2015, the Company’s Board of Directors authorized
the repurchase of up to an additional $50 million of the
Company’s common stock. Repurchases may be made in open
market or through privately negotiated transactions. Through
December 31, 2016, the Company has not repurchased any of
its common stock under this authorization.
At December 31, 2016, the Company has $54.9 million
remaining under its share repurchase program. A covenant
under the Company’s Credit Facility limits the amount that
may be used to repurchase the Company’s common stock. At
December 31, 2016, this covenant limits additional share
repurchases to $4.9 million.
The Company believes the class action lawsuit and the
derivative lawsuits are without merit, and it intends to
vigorously defend against all claims asserted. Discovery has
not yet commenced. At this time, the Company is unable to
reasonably estimate the outcome of this litigation.
In addition, the U.S. Securities and Exchange Commission has
opened an inquiry related to similar issues to those raised in
the above-described litigation.
Other 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.
Legal Settlement
In December 2016, the Company reached a settlement with a
stockholder related to disgorgement of potential short-swing
profits under Section 16(b) of the Securities Exchange Act of
71
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1934 in connection with purchases and sales of Company
securities. As a result of the settlement, the Company recorded
a gain of $12.7 million.
Operating Lease Commitments
The Company has operating leases for office space, vehicles,
and equipment. Future minimum lease payments under
operating leases at December 31, 2016 are as follows (in
thousands):
Year ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total
Minimum
Lease
Payments
2,750
$
2,477
2,246
2,024
1,972
12,496
23,965
$
Rent expense under operating leases totaled $3.3 million, $2.6
million, and $2.2 million during the years ended December 31,
2016, 2015, and 2014, 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. On
January 1, 2015, the Company implemented a new matching
program. The Company matches contributions at 100% of up
to 2% of an employee’s compensation and, if greater, the
Company matches contributions at 50% from 4% to 8% of an
employee’s compensation.
During the years ended December 31, 2016, 2015, and 2014,
compensation expense included $1.0 million, $1.0 million and
$0.7 million, respectively, related to the Company’s 401(k)
match.
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from the
oil and gas industry. Customers include major oilfield services
companies, major integrated oil and natural gas companies,
independent oil and natural gas companies, pressure pumping
service companies, and state-owned national oil companies.
This concentration of customers in one industry increases
credit and business risks.
The Company is subject to 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.
Note 19 — Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an
enterprise for which separate financial information is available
that is regularly evaluated by chief operating decision-makers
in deciding how to allocate resources and assess performance.
The operations of the Company are categorized into two
reportable segments: Energy Chemistry Technologies and
Consumer and Industrial Chemistry Technologies.
• Energy Chemistry Technologies designs, develops,
manufactures, packages, and markets specialty
chemistries used in oil and natural gas well drilling,
cementing, completion, stimulation, and production. In
addition, 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.
• Consumer and Industrial Chemistry Technologies
designs, develops, and manufactures products that are
sold to companies in the flavor and fragrance industry
and the specialty chemical industry. These technologies
are used by beverage and food companies, fragrance
companies, and companies providing household and
industrial cleaning products.
The Company evaluates performance based upon a variety of
criteria. The primary financial measure is segment operating
income. Various 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.
72
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,
Energy Chemistry
Technologies
Consumer and
Industrial
Chemistry
Technologies
Corporate and
Other
Total
2016
Net revenue from external customers
Gross margin
Income (loss) from operations
Depreciation and amortization
Capital expenditures
2015
Net revenue from external customers
Gross margin
Income (loss) from operations
Depreciation and amortization
Capital expenditures
2014
Net revenue from external customers
Gross margin
Income (loss) from operations
Depreciation and amortization
Capital expenditures
$
$
$
$
$
$
188,233
74,592
29,014
5,935
10,674
213,592
81,935
43,902
4,791
12,803
268,761
117,867
84,846
4,401
6,983
Assets of the Company by reportable segments are as follows (in thousands):
Energy Chemistry Technologies
Consumer and Industrial Chemistry Technologies
Corporate and Other
Total segments
Held for sale
Total Assets
Geographic Information
$
$
$
74,599
16,086
9,664
2,257
888
56,374
14,371
8,742
2,202
568
51,091
12,897
6,558
2,138
115
— $
—
(45,982)
2,237
2,398
— $
—
(40,366)
1,742
3,020
— $
—
(32,785)
1,174
2,241
262,832
90,678
(7,304)
10,429
13,960
269,966
96,306
12,278
8,735
16,391
319,852
130,764
58,619
7,713
9,339
December 31, 2016
December 31, 2015
$
$
184,328
$
98,105
60,255
342,688
43,900
386,588
$
153,447
93,038
40,633
287,118
115,972
403,090
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,
2015
2014
2016
$
$
210,890
51,942
262,832
$
$
227,117
42,849
269,966
$
$
262,430
57,422
319,852
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
73
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:
Customer A
Customer B
Customer C
Year ended December 31,
2015
17.2%
14.6%
10.6%
2014
9.9%
22.1%
2.1%
2016
15.7%
13.2%
6.9%
Approximately 95% of the revenue from major customers noted above was from the Energy Chemistry Technologies segment.
$
$
Note 20 — Quarterly Financial Data (Unaudited)
2016
Revenue (1)
Gross margin (1)
Income (loss) from continuing operations (1)
Income (loss) from discontinued operations, net of tax
Net (loss) income
Basic earnings (loss) per common share (2):
Continuing operations
Discontinued operations
Basic earnings (loss) per common share
Diluted earnings (loss) per common share (2):
Continuing operations
Discontinued operations
Diluted earnings (loss) per common share
(1) Amounts exclude impact of discontinued operations.
First
Quarter
Fourth
Third
Second
Quarter
Quarter
Quarter
(in thousands, except per share data)
Total
$
63,812
23,794
$
64,079
21,718
64,337
22,354
$
70,604
22,812
$ 262,832
90,678
(29) $
(111) $
(30,156)
$ (30,185) $
(2,169)
(2,280) $
(1,870) $
(876)
1,907
3,917
(51,037)
(17,836)
(2,746) $ (13,919) $ (49,130)
$
$
$
$
$
— $
(0.55)
(0.55) $
— $
(0.55)
(0.55) $
— $
(0.04)
(0.04) $
— $
(0.04)
(0.04) $
(0.03) $
(0.02)
(0.05) $
(0.03) $
(0.02)
(0.05) $
$
0.07
(0.31)
(0.24) $
$
0.07
(0.31)
(0.24) $
0.03
(0.91)
(0.88)
0.03
(0.91)
(0.88)
(2) The sum of the quarterly earnings (loss) per share (basic and diluted) may not agree to the earnings (loss) per share for the year due to the timing of
common stock issuances.
74
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First
Quarter
Fourth
Third
Second
Quarter
Quarter
Quarter
(in thousands, except per share data)
Total
2015
Revenue (1)
Gross margin (1)
Income (loss) from continuing operations (1)
Income (loss) from discontinued operations, net of tax
Net (loss) income
Basic earnings (loss) per common share (2):
Continuing operations
Discontinued operations
Basic earnings (loss) per common share
Diluted earnings (loss) per common share (2):
Continuing operations
Discontinued operations
Diluted earnings (loss) per common share
(1) Amounts exclude impact of discontinued operations.
$
$
$
$
$
$
$
$
60,106
19,806
71,949
24,552
(515) $
2,770
(15,317)
(1,000)
(1,515) $ (12,547) $
$
$
(0.01) $
(0.02)
(0.03) $
(0.01) $
(0.02)
(0.03) $
$
0.05
(0.28)
(0.23) $
$
0.05
(0.28)
(0.23) $
74,048
27,339
3,589
(1,614)
1,975
0.07
(0.03)
0.04
0.07
(0.03)
0.04
$
$
$
$
$
$
$
63,863
24,609
$ 269,966
96,306
$
7,158
1,314
(2,689)
(20,620)
(1,375) $ (13,462)
$
0.02
(0.05)
(0.03) $
$
0.02
(0.05)
(0.03) $
0.13
(0.38)
(0.25)
0.13
(0.37)
(0.24)
(2) The sum of the quarterly earnings (loss) per share (basic and diluted) may not agree to the earnings (loss) per share for the year due to the timing of
common stock issuances.
75
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are
designed to ensure that information required to be disclosed
by the Company in reports filed or submitted under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. The
Company’s disclosure controls and procedures are also
designed to ensure such information is accumulated and
communicated to management, including the principal
executive and principal financial officers, as appropriate to
allow timely decisions regarding required disclosures. There
are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility
of human error and the circumvention or overriding of controls
and 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.
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, 2016,
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, 2016.
Management’s Report on Internal Control over Financial
Reporting
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
Item 9B. Other Information.
None.
including
reporting, as defined in Rule 13a-15(f) of the Exchange Act.
The Company’s management,
the principal
executive and principal financial officers, assessed the
effectiveness of internal control over financial reporting as of
December 31, 2016, based on criteria issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(2013 Framework) (“COSO”) in Internal Control – Integrated
Framework. Upon evaluation, the Company’s management
has concluded that the Company’s internal control over
financial reporting was effective in connection with the
preparation of the consolidated financial statements as of
December 31, 2016.
The Company acquired International Polymerics, Inc. on July
27, 2016. The Company has excluded International
Polymerics, Inc. from its assessment of internal control over
financial reporting, as permitted by guidance issued by the
staff of SEC for a recently acquired business. International
Polymerics, Inc. represented approximately 4% and 2% of the
Company’s consolidated assets and consolidated net income,
respectively, as of and for the year ended December 31, 2016.
The effectiveness of the Company’s internal control over
financial reporting as of December 31, 2016 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, 2016 that have materially
affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
76
PART III
Item 10. Directors, Executive Officers and Corporate
Governance.
Item 13. Certain Relationships and Related
Transactions, and Director Independence.
The information required by this Item is incorporated by
reference to the Company’s Definitive Proxy Statement for
the 2017 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
The information required by this Item is incorporated by
reference to the Company’s Definitive Proxy Statement for
the 2017 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
Item 11. Executive Compensation.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated by
reference to the Company’s Definitive Proxy Statement for
the 2017 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
The information required by this Item is incorporated by
reference to the Company’s Definitive Proxy Statement for
the 2017 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters.
The information required by this Item is incorporated by
reference to the Company’s Definitive Proxy Statement for
the 2017 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
77
Item 15. Exhibits and Financial Statement Schedules.
PART IV
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
3.3
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Exhibit Title
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 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).
Registration Rights Agreement, dated as of July 26, 2016, by and among the Company, Donald Bramblett, and
Mark Kieper (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-3
(File No. 333-212864) filed on August 3, 2016).
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).
2010 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy
Statement filed on July 13, 2010).
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).
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).
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).
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).
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).
78
Exhibit
Number
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
21
23
31.1
31.2
32.1
32.2
Exhibit Title
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).
Employment Agreement, dated effective May 29, 2015 between the Company and H. Richard Walton (incorporated
by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 4, 2015).
Employment Agreement, dated effective May 1, 2015 between the Company and Robert M. Schmitz (incorporated
by reference to Exhibit 10.2 to the Company’s Form 8-K filed on June 4, 2015).
Third Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated June
19, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 24, 2015).
Fourth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated July
21, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 23, 2015).
Employment Agreement, dated effective January 1, 2016 between the Company and H. Richard Walton
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 7, 2016).
Employment Agreement, dated effective January 1, 2016 between the Company and Joshua A. Snively, Sr.
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on January 7, 2016).
Fifth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated effective
March 31, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 3, 2016).
Form of Subscription Agreement, dated as of July 26, 2016 (incorporated by reference to Exhibit 10.1 to the
Company’s Form 8-K filed on August 1, 2016).
Sixth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated effective
September 30, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on November
2, 2016).
* 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.
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-Q, not filed.
Filed electronically with this Form 10-Q.
79
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: February 8, 2017
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
John W. Chisholm
/s/ ROBERT M. SCHMITZ
Robert M. Schmitz
/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
/s/ MICHELLE M. ADAMS
Michelle M. Adams
President, Chief Executive Officer, and Chairman of the Board
February 8, 2017
February 8, 2017
February 8, 2017
February 8, 2017
February 8, 2017
February 8, 2017
February 8, 2017
February 8, 2017
February 8, 2017
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
80
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FLOTEK INDUSTRIES, INC.
LIST OF SUBSIDIARIES
EXHIBIT 21
Flotek Chemistry, LLC
Oklahoma Limited Liability Company
CESI Manufacturing, LLC
Oklahoma Limited Liability Company
Material Translogistics, Inc.
Texas Corporation
Flotek Industries FZE
Jebel Ali Free Zone Establishment
FraxMax Analytics, LLC
Texas Limited Liability Company
Flotek Services, LLC
Panama Limited Liability Company
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
Flotek Hydralift, Inc.
Texas Corporation
IPI Logistics, Inc.
Georgia Corporation
Flotek Ecuador Investments, LLC
Texas Limited Liability Company
Flotek Ecuador Management, LLC
Texas Limited Liability Company
Flotek Chemical Ecuador Cia. Ltda.
Ecuador Limited Liability Company
Florida Chemical Company, Inc.
Delaware Corporation
FC Pro, LLC
Delaware Limited Liability Company
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 Holdings Limited
England and Wales Corporation
Flotek Industries UK Limited
England and Wales Corporation
Flotek Technologies ULC
British Columbia Unlimited Liability Company
International Polymerics, LLC
Georgia Limited Liability Company
Waring Cleveland, LLC
Georgia Limited LIability Company
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We 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, 333-198757 and 333-213407) and on Form S-3 (Nos. 333-161552, 333-166442,
333-166443, 333-173806, 333-174199, 333-189555 and 333-212864) of Flotek Industries, Inc. and subsidiaries (the “Company”)
of our reports dated February 8, 2017, relating to the consolidated financial statements of the Flotek Industries, Inc. and subsidiaries
and the effectiveness of internal control over financial reporting of the Flotek Industries, Inc. and subsidiaries, appearing in the
Annual Report on Form 10-K of Flotek Industries, Inc. and subsidiaries for the year ended December 31, 2016.
We also consent to the reference to our firm under the heading “Experts” in such Registration Statements.
EXHIBIT 23
/s/ Hein & Associates LLP
Houston, Texas
February 8, 2017
Exhibit 31.1
I, John W. Chisholm, certify that:
1. I have reviewed this Annual Report on Form 10-K of Flotek Industries, Inc.;
CERTIFICATION
2. To the best of my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. To the best of my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: February 8, 2017
/s/ JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer and
Chairman of the Board
Exhibit 31.2
I, Robert M. Schmitz, certify that:
1. I have reviewed this Annual Report on Form 10-K of Flotek Industries, Inc.;
CERTIFICATION
2. To the best of my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. To the best of my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: February 8, 2017
/s/ ROBERT M. SCHMITZ
Robert M. Schmitz
Executive Vice President and
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,
2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies,
pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: February 8, 2017
/s/ JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer and
Chairman of the Board
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,
2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies,
pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: February 8, 2017
/s/ ROBERT M. SCHMITZ
Robert M. Schmitz
Executive Vice President and
Chief Financial Officer
FLOTEK INDUSTRIES
ANNUAL MEETING
Friday, April 21, 2017
2:30 pm CDT
Flotek Industries, Inc.
Global Research &
Innovation Center
8846 N. Sam Houston Pkwy. W
Suite 150
Houston, TX 77064
STOCK EXCHANGE LISTING
The company’s common stock
trades on the New York Stock
Exchange, under the symbol
“FTK”
TRANSFER AGENT
American Stock Transfer &
Trust Company
6201 15th Ave.
Brooklyn, New York 11219
800-93 7-5449
AUDITORS
Hein & Associates LLP
500 Dallas St., Suite 2500
Houston, TX 77002
713-850-9814
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
John W. Chisholm,
Chairman of the Board
Kenneth T. Hern, Lead Director
Chairman, Governance &
Nominating Committee
Member, Compensation
Committee
Member, Audit Committee
Michelle M. Adams, Director
Appointed January 2017
Member, Governance &
Nominating Committee
Ted D. Brown, Director
Member, Governance &
Nominating Committee
Member, Compensation
Committee
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
John W. Chisholm,
Chief Executive Offi cer and
President
Joshua A. Snively, Sr.,
Executive Vice President,
Chemistry Research
President, Florida Chemical
Company, Inc.
Robert C. Bodnar, Executive
Vice President, Performance
and Transformation Offi cer
H. Richard Walton
Executive Vice President and
Chief Financial Offi cer
THE PURSUIT OF
THE PURSUIT OF
TRANSFORMATIVE
TRANSFORMATIVE
CHEMIS TRY
2016
ABOUT THE COVER:
THE UNIVERSE
Like the vastness of our universe,
chemistry is far reaching in its ability to
shape the world around us.
The molecule of d-Limonene from a
citrus tree can change the performance
of a reservoir.
The application of orange oil added to
fl avor and fragrances can transport you
to an orange grove.
At Flotek, we are creating new discoveries
that have a transformative impact. Our
vision is rooted in sustainability and
responsibility for our stakeholders,
communities and the environment.