FLOTEK
INDUSTRIES
2017
ANNUAL
REPORT
ABOUT THE COVER
Following a year focused
on our core strengths,
Flotek emerges as a
re-defi ned organization.
Like pieces of a puzzle, Flotek employees
and leadership joined together to increase
our discipline and draw on our synergies.
We have evolved as a business whose
whole is greater than the sum of our
individual parts.
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INDUSTRIES
2017
ANNUAL
REPORT
01FLOTEK
OUR MISSION
Flotek Industries Inc. partners with
our clients to provide prescriptive,
performance-enhancing chemistry
technology that adds value to our
clients’ assets and bottom lines.
Driven by research and innovation, our mission is to build
trusted relationships with our clients – we do that by
communicating honestly, upholding integrity in our data
and interactions, and caring for our clients’ resources as
if they were our own. Character of the organization and
our people matters greatly at Flotek and our values will
not be compromised. We are committed to delivering the
highest standards of quality, loyalty and service to be the
best partners to a broad range of industries where our
innovation can make a difference.
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INDUSTRIES
2017
ANNUAL
REPORT
02FLOTEK
From the CEO:
LETTER TO
SHAREHOLDERS
In 2017, Flotek embarked on and completed a signifi cant
transformation. In a year marked by a rebounding—yet volatile—oil
and gas market, disruption in the citrus supply due to Hurricane
Irma and ongoing citrus greening disease, we strategically realigned
the organization to focus on our core business. Through it all, we
remained disciplined and focused on fortifying our foundation. As we
transition into 2018, Flotek is well positioned and fi nancially sound
to weather any environment going forward – a truly sustainable
business built for the future. Today, we stand as an asset-light,
specialty chemistry technology company that seeks to work closely
with our clients in the energy, consumer & industrial and fl avor &
fragrance industries. Looking ahead to 2018, we will mark our fi rst
year as a public Company with this as a sole focus.
Flotek is a leading developer of innovative chemistry-
based technology delivering prescriptive solutions to
clients in the energy, food & beverage and consumer &
industrials industries.
INDUSTRIES
2017
ANNUAL
REPORT
03FLOTEK
Key highlights for 2017 include:
For our Energy Chemistry Technology segment,
we successfully expanded our Prescriptive
Chemistry Management® platform, delivering
a wide range of chemistry technologies to our
clients—operators and service companies.
For our Consumer & Industrial Chemistry
Technology segment, we broadened our
footprint and capability to deliver citrus-based
flavor and fragrance applications within the U.S.,
to Asia and beyond.
Successfully divested our non-core business
units—Drilling Technologies and Production
Technologies segments.
Initiated and executed on an aggressive cost-
reduction program to increase operating income
and improve profitability, while reducing debt
obligations.
Established a new leadership team, built to last
with a future-focused perspective.
Sustained our unwavering commitment to
Research & Innovation, enhancing our intellectual
property, enabling product expansion and growth
opportunities.
FY17
REVENUE UP
20.6%
over FY16
FY17 TOTAL
REVENUE
$317
Million
FY17
NET DEBT
DOWN
46.4%
over FY16
Q4 FY17
CASH
SG&A DOWN
25%
over Q4 FY16 exceed-
ing target by 5%
COST DISCIPLINE: In mid-2017, Flotek embarked on an effort to reduce Corporate General &
Administrative Costs and Segment Selling & Administrative (SG&A) costs. Our fourth quarter 2017
cash SG&A decreased 25% year-over-year [compared to fourth quarter 2016], which was ahead of our
20% reduction target. Going forward, cost discipline will remain a core tenant of our organization as we
continue to maximize our profitability.
FY17 BY THE
NUMBERS
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INDUSTRIES
2017
ANNUAL
REPORT
04FLOTEK
FLOTEK PATENT
PORTFOLIO
Over the past fi ve years, our
granted patents have more
than quadrupled.
PATEN
T
S
RESEARCH &
INNOVATION
2013 – 2017
PAT E N T S
›4X
At our core, Flotek is driven by innovation.
In 2017, we remained steadfast in our commitment to and investment in research & innovation. This
focus fueled our responsiveness to our clients and the broader market, including new chemistry
applications and product introductions.
Over the past year, we expanded our intellectual property—with our total patent assets reaching 113
across all business units. Investment in new chemistry technologies, anchored and protected by
our expansive patent portfolio, serves as the growth engine of Flotek for today and the future. As a
case in point, more than half of our 2017 ECT sales were driven by Complex nano-Fluid® formulations
created within the past fi ve years, demonstrating the future benefi t of today’s investments.
As a result of our capabilities, we can identify and respond to a wide range of opportunities, from
enhancing oil and gas production around the world to delivering creative fl avor and fragrance
technologies to our growing client base.
Reservoir Cognitive Consultant™:
Where Innovation Meets Data
Reservoir Cognitive Consultant ™
Data is fundamental to our ability to develop new technologies—enabling our scientists to take our
chemistries from the lab to the fi eld and back to the lab with new insights to create new products. That
is why in 2017, Flotek and IBM launched a joint agreement to develop a new solution for the oil and gas
industry, harnessing IBM Watson.
The Reservoir Cognitive Consultant™, or RC2 ™, is designed to analyze Flotek’s proprietary oilfi eld
chemistry data, merge it with oil and gas client-contributed data and further enhance it by adding
public data sources. The result will be a cognitive-driven, bias-free, insight-rich tool that will
help clients optimize their completions. In addition to bringing value to our clients, this data and
insights will help Flotek accelerate our innovation cycle to deliver new technologies to the market—
compressing our time from lab to client to analysis, back to lab for development.
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INDUSTRIES
2017
ANNUAL
REPORT
05FLOTEK
Luq Niazi, IBM’s Global
Managing Director,
Chemical & Petroleum
Industries, and John
Chisholm, Flotek’s
Chairman, CEO &
President announce
partnership.
Where It All Starts:
Flotek Global Research &
Innovation Center
In 2017, we commemorated the one-
year anniversary of the opening of
our Global Research & Innovation
Center in Houston. Over the past
year, we opened our doors to
clients, industry partners, investors,
academic collaborators, students and
community organizations. From our
research headquarters this year, we:
collaborated with clients to solve their immediate
challenges;
prescribed hundreds of customized chemistry
technologies to clients across the globe aimed
at adding value, increasing productivity and cash
fl ow;
partnered with academic institutions to solve
challenges with next generation technologies;
introduced new technologies into the market to
meet near and long-term demands.
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INDUSTRIES
2017
ANNUAL
REPORT
06FLOTEK
ENERGY
CHEMISTRY
TECHNOLOGIES
PA
CANNONSBURG
Over the past few years, the energy industry has
endured extraordinary challenges that ushered in
historic declines in drilling and completion activity.
In 2017, the industry experienced a recovery that brought increased
optimism and onshore drilling and completion activity, yet was still
punctuated with volatility in commodity pricing and complications
associated with a return of growth after drastic reductions in operational
footprints. These challenges were compounded by weather events and
isolated hydrocarbon takeaway issues. Through these fl uctuations, the
industry sought to do more with limited resources, which led to impressive
effi ciencies and experimentation, proving once again that oil and gas
companies operate with tremendous resourcefulness.
Through the industry’s resourcefulness it pushed new limits: increasing frac
stages while pushing out well spacing, extending the life of pumping equipment
and applying more intensive fracs using more proppant than ever before.
Having achieved these remarkable feats, there is no question chemistry is
the new frontier to push our limits even further, and there is much more to
achieve through customization of treatment to the reservoir. Given the vast
diversifi cation of geology and reservoir types, the demand for prescriptive
chemistry is critical for greater completion optimization and poised to gain a
greater portion of the industry’s attention going forward.
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INDUSTRIES
2017
ANNUAL
REPORT
07FLOTEK
In 2017, Flotek continued to align more closely
with our clients—both service companies and
operators— to deliver value-added chemistries
that meaningfully impact performance and
address a broader range of reservoir challenges.
Our vision is to provide a chemistry experience unlike any other through our Prescriptive Chemistry
Management® (PCM®) program, delivering direct-to-client a wide range of conventional and
patented chemistries customized to optimize completions for specifi c geologies and reservoirs.
Building upon our reputation and successes established over nearly a decade with our fl agship,
patented Complex nano-Fluid®, our PCM® program accelerated in 2017 as the market demanded a
reduction in redundant logistics and distribution costs while also delivering proven technology and
reliable service.
Looking ahead to 2018, we see increased interest and activity for our PCM® platform, as we
continue to enhance our capability to analyze and prescribe predictive, reservoir-based chemistry
technologies. In order to meet the market demand and increased activity, we opened a facility in
Pennsylvania to support client activity in the Northeast. In the year ahead, we will expand and improve
our footprint to optimize delivery and manufacturing capabilities.
Energy Chemistry Technologies (ECT)
Our Energy Chemistry Technologies segment develops and delivers
prescriptive chemistry technologies to our clients, including oil & gas
operators and service companies.
Our chemistry technologies and reservoir application platforms enable the delivery of chemistries
that add meaningful value to our clients’ assets. Our total fl uids systems include custom technologies
and conventional chemistries that address every challenge in the lifecycle of the reservoir and fi eld—
from drilling to cementing to completion and stimulation activity designed to maximize recovery in
both new and mature fi elds.
FY17 ECT
REVENUE
$243
Million
FY17 ECT
YOY INCREASE
IN REVENUE
29.2%
FY17 ECT
OPERATING
INCOME
$33.6
Million
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INDUSTRIES
2017
ANNUAL
REPORT
08FLOTEK
Complex nano-Fluid® Technology:
Refl ecting Back and Looking Ahead
Flotek’s fl agship line of chemistry technology products, Complex nano-Fluid®,
made from naturally sustainable and non-toxic citrus oil, has been a game-
changer for the industry, helping our clients improve their well performance,
productivity and fi nancial returns.
With the fi rst CnF® patent granted in 2008, Flotek has spent the past decade innovating and expanding
the product line to address a wider range of reservoir challenges. Today, we have more than 50
custom-designed CnF® formulations that generate hundreds of millions of dollars in annual revenue.
The spark ignited by our fi rst CnF® formulation nearly 10 years ago has propelled us to expand our
technology portfolio and through continuous innovation, today, we are able to deliver total fl uid
systems that incorporate both our patented and conventional chemistries.
Complex nano-Fluid® Technology: Driving
Value & ROI for our Clients
In early 2018, Flotek conducted a 600+ well study in the Wolfcamp A & B
reservoirs in West Texas, evaluating performance and economics of wells
treated with our CnF® customized for the unique geology of the Midland Basin.
WOLFCAMP A & B
30% AND
22%
production uplift
with CnF®
Wells treated with CnF® outperformed the non-treated wells over an initial 12-month production
period. In each reservoir, wells treated with CnF® experienced a cumulative production uplift. During
this time period, wells in Wolfcamp A & B normalized for proppant intensity, saw production uplift of
30% and 22%, respectively, when compared to the non-treated wells. Additionally, the decline curves
demonstrated meaningful, sustained economic benefits.
Tested and proven over nearly a decade, CnF® continues to deliver value to our clients by improving
reservoir performance and productivity.
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INDUSTRIES
2017
ANNUAL
REPORT
09FLOTEK
CONSUMER &
INDUSTRIAL
CHEMISTRY
TECHNOLOGIES
Last year, the global market saw
increased demand for natural citrus
fl avors and fragrances through
citrus crop disruptions. As one of
the largest processors of citrus
oils in the world, Flotek was able to
position our inventory to withstand
market volatility and continue to
deliver high-quality chemistries to
our clients.
In 2017, we focused on expanding our fl avor and
fragrance offering with the opening of a sales
offi ce in Tokyo, Japan, in response to growing
demand in Asia for natural, citrus-based
chemistries that enhance food and beverages.
Additionally, we enhanced and expanded our
citrus oil processing capacity with the installation
of a new vacuum distillation unit. The new,
state-of-the art distillation tower will allow us
to diversify our citrus processing capability to
include lemon and lime cultivars, underscoring
and solidifying our commitment to the industry
as one of the largest global creators of citrus oil
fractions, isolates and derivatives.
In 2018 and beyond, we will leverage our world-
class manufacturing strength and talent to
capture higher margin fl avor opportunities which
include other citrus varietals and applications.
Consumer & Industrial
Chemistry Technologies
(CICT)
Flotek’s Consumer & Industrial Chemistry
Technologies designs and delivers high-quality
products that meet the demands of a variety of
consumer and industrial applications, including
food and beverage, fragrance, and household and
industrial cleaning products. We source citrus oil
domestically and internationally and are one of
the largest processors of citrus oils in the world.
FY17 CICT
REVENUE
$74.0
Million
FY17 CICT
OPERATING
INCOME
$7.5
Million
JAPAN
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INDUSTRIES
2017
ANNUAL
REPORT
10FLOTEK
EXECUTIVE OFFICERS
MEET OUR
LEADERS
In 2017, our leadership
team was transformed
to reflect the future of
Flotek, strengthening
the company as
we enter 2018 as a
redefined organization.
JOHN W. CHISHOLM
Chairman, President & Chief
Executive Officer
John joined the company in 2009
as Interim President. In 2010, he
became Flotek’s President. He
became Chief Executive Officer in
March 2012, and continues to guide
the Flotek vision and strategy.
JOSH SNIVELY
Executive Vice President,
Head of Operations
In 2017, Josh assumed the role of
EVP and head of all Flotek opera-
tions, bringing together his keen
understanding of both Consumer
& Industrial and Energy Chemistry
segments and driving greater
company-wide synergies as the
company focused on increasing cash
flows through streamlined process-
es. He joined the Flotek family in
2013 following Flotek’s successful
acquisition of Florida Chemical,
where he grew the business to a
multi-national, citrus-based
specialty chemical company.
H. RICHARD WALTON
Chief Accounting Officer
Rich has spent his 30-year career
in public accounting as a certified
public accountant. At Flotek, he
oversees the company’s financial
statement audits and registration of
securities with the SEC.
MATT MARIETTA
Executive Vice President,
Finance & Corporate Development
Matt joined Flotek in 2017 from
Stephens, Inc., where he was a
publishing sell-side analyst covering
Flotek. He oversees the company’s
financial strategy, M&A and general
corporate development functions.
Additionally, he assists the sales
organization in business development
and accounting and financial
reporting to improve consistency.
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INDUSTRIES
2017
ANNUAL
REPORT
11FLOTEK
Board Transitions
In early 2018, Flotek announced two
Board of Directors transitions. Carla
Schulz Hardy and John Reiland will
conclude their respective tenures as
directors of the board in April 2018.
CARLA SCHULZ HARDY joined the Flotek board
in 2013, following Flotek’s strategic acquisition of
Florida Chemical Company. Founded more than
75 years ago by Carla’s father, environmentalist
Bert Schulz, Florida Chemical was created based
on the belief that renewable and sustainable
chemistries could improve the world. As
Chairman of the Board for Florida Chemical for
seven years (2006 – 2013), Carla carried on her
father’s legacy as a champion of the renewable
and sustainable value of citrus oils in their many
commercial applications. As a member of the
Flotek board for the past five years, she provided
steady leadership and remained a guiding force
through the ongoing integration of Flotek and
Florida Chemical. Throughout her term, she
continued to represent and advance the shared
interests and synergies of the company’s energy
and consumer & industrial segments. In no small
part, her efforts contributed to the success a
combined Flotek has realized today. She led the
Compensation Committee, which will now be
chaired by board member Michelle Adams.
JOHN REILAND has been a Director of the Flotek
board since 2009. Over this time, he has served
as a member of the Compensation Committee,
a member of the Corporate Governance and
Nominating Committee and Chairman of the Audit
Committee since November 2009. His efforts and
commitment have benefitted the organization.
Mel Cooper will assume the role of Audit
Committee Chairman.
Looking ahead, Flotek will reimagine our board
with an ever increasing focus on independence,
diversity and enhanced governance.
WILLIAM YORK
Chief Administrative Officer
Bill is Flotek’s newest member
of our leadership team, having
joined in early 2018 with a diverse
background, spanning the banking
and technology sectors. Bill brings
his vast experience to oversee
human resources, information
technology, legal, safety and
administrative functions.
BOB FIELDING
Senior Vice President,
Data & Cognitive Impact
Bob joined Flotek approximately four
years ago, following engineering
consulting and management
positions with Halliburton, BP,
Marathon Oil and Wellogix. He
oversees Flotek’s partnership with
IBM Watson.
DANIELLE ALLEN
Senior Vice President, Global
Communications & Technology
Commercialization
Danielle joined Flotek in April 2017
where she oversees all global
marketing and communications
initiatives, while also leading the
go-to-market strategy for Flotek’s
diversified specialty chemical
products and services. Previously,
she held a senior leadership role at
global communications marketing
firm Edelman.
JAMES SILAS, PH. D.
Senior Vice President,
Research & Innovation
James joined Flotek in 2013 and in
October 2017, he became a member
of Flotek’s leadership team. He
leads Flotek’s global research &
innovation strategy, which includes
overseeing the company’s patent
portfolio and product development.
He brings more than 15 years of
physics and chemistry experience
and previously served on the faculty
of Texas A&M University.
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INDUSTRIES
2017
ANNUAL
REPORT
12FLOTEK
In closing...
In 2017, we set into motion our future as
an asset-light, innovation-based custom
chemistry company. In 2018, with this vision
as our singular focus, we believe we are
positioned to provide best-in-class returns
for all of our stakeholders.
Sincerely,
JOHN W. CHISHOLM
Chairman, President & CEO
Flotek Industries
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, 2017
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
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
No
that the registrant was required to submit and post such files). Yes
• 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, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
(Do not check if a smaller reporting company)
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2017 (based on the closing market price on the
NYSE Composite Tape on June 30, 2017) was approximately $437,821,000. At January 31, 2018, there were 56,756,480 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 2018 Annual Meeting of Stockholders.
[THIS PAGE INTENTIONALLY LEFT BLANK]
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
4
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. . . . . . . . . . . . . .
20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39
41
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . .
75
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
Item 9B. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
Item 10.
Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
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
such as “anticipate,” “believe,” “estimate,”
words
“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
future performance. Forward-looking
guarantees of
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 food and
beverages, cleaning products, cosmetics, 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
website, www.flotekind.com, as
soon as practicable
subsequent to electronically filing or furnishing to the SEC.
Information contained in the Company’s website is not to be
considered as part of any regulatory filing. As used herein,
“Flotek,” the “Company,” “we,” “our,” and “us” refers to
Flotek Industries, Inc. and/or the Company’s wholly owned
subsidiaries. The use of these terms is not intended to connote
any particular corporate status or relationship.
Recent Developments
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. During 2017, the Company completed
the sale of substantially all of the assets and transfer of certain
specified liabilities and obligations of each of the Drilling
Technologies and Production Technologies segments. An
investment banking advisory services firm was engaged and
actively marketed these segments. The Company has
classified the assets, liabilities, and results of operations for
these two segments as “Discontinued Operations” for all
periods presented.
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.
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.
Description of Operations and Segments
The Company has two strategic business segments: Energy
Chemistry Technologies and Consumer and Industrial
Chemistry Technologies. The Drilling Technologies and
Production Technologies segments were sold during 2017 and
all historical information is 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.
Financial
information about operating segments and
geographic concentration is provided in Note 18 – “Segment
and Geographic Information” in Part II, Item 8 – “Financial
Statements and Supplementary Data” of this Annual Report.
Information about the Company’s two operating segments is
below.
Energy Chemistry Technologies
The Energy Chemistry Technologies (“ECT”) segment
designs, develops, manufactures, packages, distributes, and
markets specialty 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-specific conditions to be compliant with
customer specifications. This segment has technical services
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
1
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, provided downhole
drilling tools for use in energy and mining activities. This
segment assembled, rented, sold, inspected, and marketed
specialized equipment used in energy, mining, and industrial
drilling activities. Established tool rental operations were
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, provided
pumping system components, electric submersible pumps
and
(“ESPs”), gas
complementary services. Through the Company’s acquisition
of IAL, the Company provided a line of next generation
hydraulic pumping units that served to increase and maximize
production for oil and natural gas wells.
separators, production valves,
Seasonality
Overall, operations are not significantly affected by
seasonality; however, winter weather conditions can pose
delays in clients’ activity levels, primarily in oil and gas.
Certain working capital components build and recede
throughout
in conjunction with established
purchasing and selling cycles that can impact operations and
the year
2
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.
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 and beverage
manufacturing companies. In the two segments reported in
continuing operations, the Company had one major customer
for the year ended December 31, 2017, which accounted for
13% of consolidated revenue, two major customers for the
year ended December 31, 2016, which accounted for 16% and
13% of consolidated revenue, and three major customers for
the year ended December 31, 2015, which accounted for 17%,
15%, and 11% of consolidated revenue. In aggregate, the
Company’s largest three customers collectively accounted for
27%, 36%, and 43% of consolidated revenue for the years
ended December 31, 2017, 2016, and 2015, respectively.
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, 2017,
2016, and 2015, the Company incurred $13.6 million, $9.3
million, and $6.7 million, respectively, of research and
innovation expense. In 2017, research and innovation expense
was approximately 4.3% of consolidated revenue. The
Company expects that its 2018 research and innovation
investment will continue to remain a material portion of
overall spending to support new product development and
customization initiatives for its clients.
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. The Company currently has 28
issued patents and over seven 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 70 registered trademarks and over
two 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 goods and 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 completion designated
capital spending. Domestic and international regions in which
Flotek operates are highly competitive. The unpredictability
of the energy industry and commodity price fluctuations
creates 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.
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, 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, 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
3
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
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.
insurance proceeds,
to
Employees
At December 31, 2017, the Company had 334 employees,
exclusive of existing worldwide agency relationships. None
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
4
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.
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 2017 Annual Chief Executive Officer Certification
required by the NYSE was submitted on May 1, 2017. 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 2018 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.
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.
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 completion spending is drilling
activity as measured by rig count, which the Company actively
monitors to gauge market conditions and forecast product and
service demand. In addition, the U.S. Energy Information
Administration (“EIA”) and other industry data sources report
completion activity which is utilized by the Company. A
reduction in drilling and completion 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
is
The Company’s consumer and
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.
5
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
requires new product
Company’s continued success
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.
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
the Company, seeking damages
proceedings against
(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.
6
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.
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 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, 2017, 2016, and
2015, totaled 27%, 36%, and 43%, 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
products 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 and international vendors.
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, but may
consider such strategies in the future, 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.
The Company depends on the continued service of the Chief
Executive Officer and President, the Chief Financial Officer,
the Executive Vice President of Operations, 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 certain of these key members; however, at
December 31, 2017, 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. Effective February 13, 2017, Robert M. Schmitz
retired as the Company’s Executive Vice President and Chief
Financial Officer. On June 30, 2017, Steven A. Reeves retired
as the Company’s Executive Vice President of Operations. On
October 7, 2017, Robert C. Bodnar departed from the
Company as the Executive Vice President and Performance
and Transformation Officer. The Company can provide no
assurance that appropriate 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
7
systems, such as network communications disruptions, could
have an adverse effect on our ability to conduct operations and
could directly impact consolidated reporting. Security
breaches pose a risk to confidential data and intellectual
property, which could
to our
result
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.
in damages
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
diminished
a
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:
•
•
•
•
•
•
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
8
•
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.
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 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
strategic growth plans,
take advantage of business
opportunities, or to respond to competitive pressures. The
Company filed a “universal” shelf registration on September
21, 2017, to permit the ability to sell securities to the public
in a timely manner and which it expects to keep active.
The Company’s revolving credit facility has variable interest
rates that could increase.
At December 31, 2017, the Company had a $75 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, 2022.
There can be no assurance that the revolving credit facility
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.
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
goods and services purchased
the Company.
Furthermore, collectability of international sales can be
subject to the laws of foreign countries, which may provide
more limited protection to the Company in the event of a
dispute over payment. 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
from
Company, it could have an adverse effect of the Company’s
financial results, liquidity and cash flows.
the Company’s business, financial condition, and results of
operations.
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
products, exposure
substances, patent
to hazardous
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
9
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, chemical exposure assessment, 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,
registrations, and certificates as required from regulatory
authorities. Sanctions for noncompliance with such laws and
regulations could include assessment of administrative, civil
and criminal penalties, revocation of permits, and issuance of
corrective action orders.
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.
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
certain non-proprietary
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.
However, in June 2017, the Trump Administration announced
plans to withdraw from the Paris Agreement. Legislation and
regulatory initiatives at the federal, 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.
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
10
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;
• war and other international conflicts;
•
•
•
•
•
•
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 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.
world may also impact demand for the Company’s products
and services both domestically and internationally.
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.
Recently enacted U.S. tax legislation, as well as future U.S.
tax legislation, may adversely affect our business, results of
operations, financial condition and cash flow.
Comprehensive tax reform legislation enacted in December
2017, commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”), makes significant changes to U.S. federal income
tax laws. The Tax Act, among other things, reduces the
corporate income tax rate to 21%, partially limits the
deductibility of business interest expense and net operating
losses, imposes a one-time tax on unrepatriated earnings from
certain foreign subsidiaries, taxes offshore earnings at reduced
rates regardless of whether they are repatriated and allows the
immediate deduction of certain new investments instead of
deductions for depreciation expense over time. Although we
have estimated the impact of the newly enacted tax legislation
by incorporating assumptions based upon our current
interpretation and analysis to date, the Tax Act is complex and
far-reaching, and we have not completed our analysis of the
actual impact of its enactment on us. There may be other
material adverse effects resulting from the Tax Act that we
have not identified and that could have an adverse effect on
our business, results of operations, financial condition and
cash flow.
Risks Related to the Company’s Industries
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. Geopolitical unrest around the
Demand for the Company’s energy segment’s products and
services is dependent on oil and natural gas industry activity
and expenditure levels that are directly affected by trends in
oil and natural gas prices. Demand for the Company’s 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 completion activity and spending is rig count,
which the Company monitors to gauge market conditions. In
addition, the EIA and other industry data sources report
completion activity which is utilized by the Company. Any
prolonged reduction in oil and natural gas prices or drop in rig
and/or completion count could depress current levels of
exploration,
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.
development,
production
and
if
affected
economic
The Company’s consumer and industrial customers would be
activity decreased
adversely
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
major retail branded products would adversely affect the
segment.
retail beverages and
in major
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 completion 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 impact the
11
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.
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
levels. 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.
Future 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
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
12
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
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 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.
13
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 filed a “universal” shelf registration on
September 21, 2017, to permit the ability to sell securities to
the public in a timely manner and which it expects to keep
active.
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.” In addition, under the Tax Act, the ability
to carry back NOLs to prior taxable years is generally
eliminated, and while NOLs arising in tax years beginning
after 2017 may be carried forward indefinitely, these
post-2017 NOLs may only reduce 80% of the Company’s
taxable income in a tax year. Limitations imposed on the ability
to use NOLs and tax credits to offset future taxable income
could reduce or eliminate the benefit of the NOLs and tax
attributes and 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. 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, 2017,
the Company operated 18
manufacturing, warehouse, and research facilities in 9 U.S.
states, one research facility in Calgary, Alberta, and sales
offices in Tokyo, Japan and Dubai, United Arab Emirates. The
Company owns 7 of these facilities and the remainder are
leased with lease terms that expire from 2018 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
Segment
Energy Chemistry
Technologies
Owned/
Leased
Location
Owned Carthage, Texas
Owned Dalton, Georgia
Owned Marlow, Oklahoma
Owned Monahans, Texas
Owned Waller, Texas
Leased Calgary, Alberta
Leased Denver, Colorado
Leased Dubai, United Arab Emirates
Leased Houston, Texas
Leased Hurst, Texas
Leased Midland, Texas
Leased Natoma, Kansas
Leased Pittsburgh, Pennsylvania
Segment
Energy Chemistry
Technologies
Consumer and
Industrial
Chemistry
Technologies
Discontinued
Operations
Owned/
Leased
Location
Leased Plano, Texas
Leased Raceland, Louisiana
Owned Winter Haven, Florida
Leased Tokyo, Japan
Owned Vernal, Utah
Leased Odessa, Texas
Leased Pittsburgh, Pennsylvania
Leased Wysox, Pennsylvania
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 lawsuits are without merit and
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, as previously disclosed, the U.S. Securities and
Exchange Commission had opened an inquiry related to
similar issues to those raised in the above-described litigation.
On August 21, 2017, the Company received a letter from the
staff of the SEC stating that the inquiry has been concluded
and that the staff does not intend to recommend an enforcement
action against the Company.
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.
Item 3. Legal Proceedings.
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern
District of Texas granted the Company’s motion to dismiss the
four consolidated putative securities class action lawsuits that
were filed in November 2015, against the Company and
certain of its officers. The lawsuits were previously
consolidated into a single case, and a consolidated amended
complaint had been filed. The consolidated amended
complaint asserted 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 sought 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.
The lead plaintiff appealed the District Court’s decision
granting the motion to dismiss.
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, 2018, there were
56,756,480 shares of common stock outstanding held by
approximately 14,800 holders of record. The Company’s
closing sale price of the common stock on the NYSE on
January 31, 2018 was $5.50. 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
$14.12
$12.85
$9.34
$5.31
2017
2016
Low
$9.50
$7.95
$4.65
$4.28
High
$11.11
$13.82
$16.60
$14.84
Low
$5.52
$6.73
$12.88
$8.96
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,
2012 through December 31, 2017. The performance graph
assumes $100 invested on December 31, 2012 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, 2012
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
2012
2013
2014
2015
2016
2017
Flotek Industries, Inc.
Russell 2000 Index
Philadelphia Oil Service Index (OSX)
2012
2013
2014
2015
2016
2017
December 31,
Flotek Industries, Inc.
Russell 2000 Index
Philadelphia Oil Service Index (OSX)
$
$
$
100
100
100
$
$
$
165
137
128
$
$
$
154
142
96
$
$
$
94
134
72
$
$
$
77
160
83
$
$
$
38
181
68
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, 2017 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)
971,589
$
— $
$
971,589
—
—
—
303,248
—
303,248
(1) Includes shares for outstanding stock options (0 shares), restricted stock awards (246,258 shares), and restricted stock unit share equivalents (725,331
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, 2017, the Company
has repurchased $25 million of its common stock under this repurchase program.
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 privately negotiated transactions. Through December 31, 2017, the
Company has repurchased $0.3 million of its common stock under this authorization and $49.7 million may yet be used to purchase
shares.
Repurchases of the Company’s equity securities during the three months ended December 31, 2017 are as follows:
Total
Number
of Shares
Purchased (1)
5,003
$
— $
$
$
268,212
273,215
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)
5.28
—
4.59
4.60
— $
— $
$
225,000
225,000
50,733,939
50,733,939
49,704,946
October 1 to October 31, 2017
November 1 to November 30, 2017
December 1 to December 31, 2017
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, 2017, this
covenant limits additional share repurchases to $9.7 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. During 2017, the Company completed
the sale or disposal of the assets and transfer or liquidation of
liabilities and obligations of each of the Drilling Technologies
and Production Technologies segments. The Company has
classified the assets, liabilities, and results of operations for
these two segments as “Discontinued Operations” for all
periods presented.
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.
Operating Data
Revenue (1)
(Loss) income from operations (1)
(Loss) income from continuing operations (1)
(Loss) income from discontinued operations, net of tax
Net (loss) income
(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
2017
As of and for the year ended December 31,
2015
(in thousands, except per share data)
2016
2014
2013
$ 317,098
(2,855)
$ 262,832
(7,304)
$ 269,966
12,278
$ 319,852
58,619
$ 243,860
37,360
$ (13,053) $
(14,342)
1,907
(51,037)
$ (27,395) $ (49,130) $ (13,462) $
7,158
(20,620)
$
$
39,622
13,981
53,603
$
$
$
$
(0.23) $
(0.25)
(0.48) $
(0.23) $
(0.25)
(0.48) $
$
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
Financial Position Data
Total assets
Convertible senior notes, long-term debt, and capital
lease obligations, less discount and current portion
Stockholders’ equity
$ 329,888
$ 383,215
$ 403,090
$ 423,276
$ 375,581
—
7,833
264,900
287,343
18,255
293,651
25,398
306,003
35,690
249,752
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
the
statements. See “Forward-Looking Statements” at
beginning of this Annual Report.
Basis of Presentation
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 sheet for
all periods presented. During 2017, the Company completed
the sale or disposal of the assets and transfer or liquidation of
liabilities and obligations of these segments.
Results of operations of the Drilling Technologies and
Production Technologies segments for the years ended
December 31, 2016 and 2015 are discussed below.
Executive Summary
Flotek is a global, diversified, technology-driven company
that develops and supplies chemistries and services to the oil
and gas industries, and high value compounds to companies
that make food and beverages, cleaning products, cosmetics,
and other products that are sold in consumer and industrial
markets. Flotek operates in over 20 domestic and international
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. Customers include major integrated oil and gas
(“O&G”)
companies,
oilfield
independent O&G companies, pressure-pumping service
companies, national and state-owned oil companies, and
international supply chain management companies. The
Company also produces non-energy-related citrus oil and
companies,
services
related products including (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 O&G
industry. The Company sources citrus oil domestically and
internationally and is one of the largest processors of citrus oil
in the world. Additionally, the Company also provides
automated bulk material handling, loading facilities, and
blending capabilities.
Continuing Operations
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 were sold during 2017 and are classified as
discontinued operations.
• Drilling Technologies assembled,
rented, sold,
inspected, and marketed downhole drilling equipment
used in energy, mining, and industrial drilling activities.
•
Production Technologies assembled and marketed
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
20
and the geographical areas of rig activity. Additional factors
that influence the level of drilling and well completion activity
include:
• Historical, current, and anticipated future O&G
prices,
•
Federal, state, and local governmental actions that
may encourage or discourage drilling activity,
• Customers’ strategies relative to capital funds
allocations,
• Weather conditions, and
• Technological changes to drilling and completion
methods and economics.
Historical North American drilling activity is reflected in
“TABLE A” below.
Customers’ demand for advanced technology products and
services provided by the Company are dependent on their
recognition of the value of:
• Chemistries that are economically viable, socially
responsible, and ecologically sound.
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
crops,
• 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
chemicals, including, but not limited to, the following
industrial applications:
• O&G drilling and completion operations,
• Chemistries that improve the economics of their
• O&G production operations, and
O&G operations,
• Chemistries that meet the need of consumer product
markets, 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
2017
2016
2015
2017 vs. 2016
% Change
2016 vs. 2015
% Change
876
206
1,082
70
736
70
876
812
270
1,082
509
130
639
60
400
49
509
471
168
639
978
192
1,170
139
744
95
978
835
335
1,170
72.1%
58.5%
69.3%
16.7%
84.0%
42.9%
72.1%
72.4%
60.7%
69.3%
(48.0)%
(32.3)%
(45.4)%
(56.8)%
(46.2)%
(48.4)%
(48.0)%
(43.6)%
(49.9)%
(45.4)%
Source: Rig counts are per Baker Hughes (www.bakerhughes.com); Rig counts are the annual average of the reported weekly rig count activity.
21
Total Completions
Total U.S. Rig Count
1,100
1,000
900
800
700
600
1,100
1,000
900
800
700
600
500
400
300
1
2
3
4
8
12 16 20 24 28 32 36 40 44 48 52
Completion Month in Quarter
Rig Count Week
Q4 2016
Q3 2017
Q4 2017
2016
2017
Source: Rig counts are per Baker Hughes (www.bakerhughes.com); Rig counts are the annual average of the reported weekly rig count activity.
Completions are per the U.S. Energy Information Administration (https://www.eia.gov/petroleum/drilling/) as of January 16, 2018.
Average U.S. rig activity increased by 72.1% in 2017
compared to 2016, and decreased 48.0% from 2015 to 2016.
According to data collected by the U.S. Energy Information
Administration (“EIA”) as reported on January 16, 2018,
completions in the seven most prolific areas in the lower 48
states increased 39.9% in 2017 compared to 2016 and
decreased 38.1% from 2015 to 2016.
Outlook for 2018
After a continuous decline in U.S. 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 remains lower than previous levels experienced before
the downturn in 2014. Assuming the price for crude oil remains
relatively stable and regulatory impediments are limited, the
Company expects U.S. oilfield activity to remain in a state of
modest recovery.
During 2017, the Company continued to promote the efficacy
of its Complex nano-Fluid® (“CnF®”) chemistries. 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 exploration and production (“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.
The Company continues to promote its patented and
proprietary chemistries 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 Houston. This
state-of-the-art facility permits the development of next-
generation innovative energy chemistries, as well as expanded
collaboration between clients, leaders from academia, and
Company scientists. These collaborative opportunities are an
important and distinguishing capability within the industry.
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, and further impacted by recent
hurricane events. This reduced supply has resulted in higher
citrus oil prices and increased price volatility. 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
volatile terpene costs through the development of new product
formulations and pricing strategies.
22
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 and initiated a process to identify potential
its Drilling Technologies and Production
buyers for
Technologies segments. During 2017,
the Company
completed the sale or disposal of the assets and transfer or
liquidation of liabilities and obligations of the Drilling
Technologies and Production Technologies segments. The
Company continues to focus on maximizing the profitability
of its product and business portfolio, which may result in
exiting or entering new product lines or businesses.
Capital expenditures for continuing operations totaled $9.0
million in 2017. The Company expects capital spending to be
between $12 million and $16 million in 2018. The Company
will remain nimble in its core capital expenditure plans,
adjusting as market conditions warrant, and will focus its
capital spending program on positive returns on capital and/
or pose strategic benefit for the long term.
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, the market
price for oil and gas, weather patterns, and/or the availability
of citrus crops, 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.
Results of Continuing Operations (in thousands):
Revenue
Cost of revenue (excluding depreciation and amortization)
$
Cost of revenue (excluding depreciation and amortization) %
Corporate general and administrative costs
Corporate general and administrative costs %
Segment selling and administrative costs
Segment selling and administrative costs %
Depreciation and amortization
Research and development costs
Loss (gain) on disposal of long-lived assets
(Loss) income from operations
Operating margin %
Gain on legal settlement
Interest and other expense, net
(Loss) income before income taxes
Income tax expense
(Loss) income from continuing operations
Loss from discontinued operations, net of tax
Net loss
$
Year ended December 31,
2016
262,832
170,255
$
$
2017
317,098
215,129
67.8 %
41,492
13.1 %
37,236
11.7 %
12,159
13,645
292
(2,855)
(0.9)%
—
(1,356)
(4,211)
(8,842)
(13,053)
(14,342)
(27,395)
$
64.8 %
43,745
16.6 %
36,405
13.9 %
10,429
9,320
(18)
(7,304)
(2.8)%
12,730
(2,282)
3,144
(1,237)
1,907
(51,037)
(49,130)
$
2015
269,966
172,033
63.7%
38,623
14.3%
31,653
11.7%
8,735
6,657
(13)
12,278
4.5%
—
(1,644)
10,634
(3,476)
7,158
(20,620)
(13,462)
Results for 2017 compared to 2016—Consolidated
Consolidated revenue for the year ended December 31, 2017,
increased $54.3 million, or 20.6%, from 2016. The increase
in revenue was due to a 29.2% increase in Energy Chemistry
Technologies revenue driven by the upturn in oilfield market
activity. This was partially offset by a slight decrease in
Consumer and Industrial Chemistry Technologies revenue
primarily related to decreased sales volumes.
Consolidated cost of revenue (excluding depreciation and
amortization) for the year ended December 31, 2017,
increased $44.9 million, or 26.4%, from 2016, and, as a
percentage of revenue, increased to 67.8% for the year ended
December 31, 2017, from 64.8% in 2016. These increases
were primarily attributable to increased inventory, freight, and
other direct costs associated with manufacturing in the Energy
Chemistry Technologies segment and increased citrus oil
prices in the Consumer and Industrial Chemistry Technologies
segment.
23
Corporate general and administrative (“CG&A”) expenses are
not directly attributable to products sold or services provided.
CG&A costs decreased $2.3 million, or 5.2%, for the year
ended December 31, 2017, from 2016. As a percentage of
revenue, CG&A declined from 16.6% to 13.1% for the year
ended December 31, 2017, compared to 2016. The decrease
in CG&A costs was primarily due to lower legal expenses and
stock compensation expense, partially offset by costs
associated with executive retirement.
Segment selling and administrative (“SS&A”) expenses are
not directly attributable to products sold or services provided.
SS&A costs increased $0.8 million, or 2.3%, for the year ended
December 31, 2017, from 2016. As a percentage of revenue,
SS&A declined from 13.9% to 11.7% for the year ended
December 31, 2017, compared to 2016. The increase in SS&A
costs was primarily due to increased head count in the Energy
Chemistry Technologies sales and support staff for new
business lines.
Depreciation and amortization expense for the year ended
December 31, 2017, increased by $1.7 million, or 16.6%, from
2016. 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, 2017, increased $4.3 million, or 46.4%, from
2016. The increase in R&I is primarily attributable to increased
personnel for new product development and Flotek’s
commitment to remaining responsive to customer needs,
increased demand, continued growth and refining of existing
product lines, and the development of new chemistries which
are expected to expand the Company’s intellectual property
portfolio.
Interest and other expense decreased $0.9 million for the year
ended December 31, 2017, compared to 2016, primarily due
to the repayment of the term loan in May 2017, as well as
decreasing the outstanding balance of the revolving credit
facility throughout 2017.
The Company recorded an income tax provision of $8.8
million, yielding an effective tax provision rate of 210.0%, for
the year ended December 31, 2017, compared to an income
tax provision of $1.2 million, yielding an effective tax rate of
39.3%, in 2016.
As part of the Company’s strategic restructuring of its business
to enable a greater focus on its core businesses in energy
chemistry and consumer and industrial chemistry, the
Company completed the sale or disposal of the assets and
transfer or liquidation of liabilities and obligations of the
Drilling Technologies and Production Technologies segments
during 2017. The Company recorded a net loss from
discontinued operations of $14.3 million for the year ended
December 31, 2017.
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 cost of revenue (excluding depreciation and
amortization) for the year ended December 31, 2016,
decreased $1.8 million, or 1.0%, from 2015, and, as a
percentage of revenue, increased to 64.8% for the year ended
December 31, 2016, from 63.7% in 2015. The increase as a
percentage of revenue was 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 products sold
in Energy Chemistry Technologies.
Corporate general and administrative (“CG&A”) expenses are
not directly attributable to products sold or services provided.
CG&A costs as a percentage of revenue rose from 14.3% to
16.6% for the year ended December 31, 2016, compared to
2015, as CG&A costs grew while revenues declined. CG&A
costs increased $5.1 million, or 13.3%, for the year ended
December 31, 2016, from 2015, primarily due to higher
professional and legal fees.
Segment selling and administrative (“SS&A”) expenses are
not directly attributable to products sold or services provided.
SS&A costs as a percentage of revenue rose from 11.7% to
13.9% for the year ended December 31, 2016, compared to
2015, as SS&A costs grew while revenues declined. SS&A
costs increased $4.8 million, or 15.0%, primarily due to
increased head count in the Energy Chemistry Technologies
sales and support staff for new business lines.
Depreciation and amortization expense for the year ended
December 31, 2016, increased by $1.7 million, or 19.4%, 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.
24
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. The Company completed the sale
or disposal of the assets and transfer or liquidation of liabilities
and obligations of the Drilling Technologies and Production
Technologies segments 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 by Segment
Energy Chemistry Technologies (“ECT”)
(dollars in thousands)
Revenue
Income from operations
Operating margin %
2017
Year ended December 31,
2016
2015
$
$
243,106
33,611
$
$
13.8%
188,233
29,014
$
$
15.4%
213,592
43,902
20.6%
Results for 2017 compared to 2016—Energy Chemistry
Technologies
Results for 2016 compared to 2015—Energy Chemistry
Technologies
ECT revenue for the year ended December 31, 2017, increased
$54.9 million, or 29.2%, from 2016, compared to a 39.9%
increase in completion activity as measured by the EIA. ECT
performed along these market indicators by continuing to
promote the benefits of its CnF® chemistries. Revenues
increased with the increased customer demand resulting from
improved oilfield market conditions.
Income from operations for the ECT segment increased $4.6
million, or 15.8%, for the year ended December 31, 2017,
compared to 2016. This increase is primarily attributable to
an increase in gross profit, increased activity associated with
sales and marketing efforts in pursuit of growth opportunities,
and cost reductions. The Company continues its commitment
to research and innovation efforts within Energy Chemistry
Technologies.
ECT 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 ECT segment
outperformed these market indicators by continuing to
aggressively promote the benefits of its CnF® chemistries.
Revenues declined due to reduced customer demand resulting
from oilfield market conditions.
from operations
Income
the Energy Chemistry
for
Technologies segment decreased $14.9 million, or 33.9%, for
the year ended December 31, 2016, compared to 2015. This
decrease is primarily attributable to the decrease in revenue,
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 (“CICT”)
(dollars in thousands)
Revenue
Income from operations
Operating margin %
Year ended December 31,
2017
2016
2015
73,992
7,465
10.1%
$
$
74,599
9,664
13.0%
$
$
56,374
8,742
15.5%
$
$
25
Results for 2017 compared to 2016—Consumer and
Industrial Chemistry Technologies
Results for 2016 compared to 2015—Consumer and
Industrial Chemistry Technologies
CICT revenue for the year ended December 31, 2017,
decreased $0.6 million, or 0.8%, from 2016, primarily due to
a decline in sales volumes. The high price for citrus oils limited
market activity and top line revenue. Citrus greening and
adverse weather reduced citrus crops globally, thereby
limiting the Company’s performance in comparison to the
growth experienced in 2016 and 2015.
Income from operations for the CICT segment decreased $2.2
million, or 22.8%, for the year ended December 31, 2017, from
2016, primarily due to higher raw material costs and increased
headcount to facilitate growth in the food and beverages
market through new research activities and the opening of a
sales office in Japan.
Discontinued Operations
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.
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.
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. During 2017, the Company completed the sale or
disposal of the assets and transfer or liquidation of liabilities
and obligations of the Drilling Technologies and Production
Technologies segments. 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.
Drilling Technologies
(dollars in thousands)
Revenue
Loss from operations
Loss from operations - excluding impairment
Operating margin % - excluding impairment
2017
Year ended December 31,
2016
2015
$
$
$
11,534
(2,646)
(2,646)
(22.9)%
$
$
$
27,627
(44,522)
(8,000)
(29.0)%
$
$
$
52,112
(27,340)
(7,772)
(14.9)%
Results for 2017 compared to 2016—Drilling Technologies
On May 22, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
liabilities and obligations of
the Company’s Drilling
Technologies segment to National Oilwell Varco, L.P.
(“NOV”) for $17.0 million in cash consideration.
On August 16, 2017, the Company completed the sale of
substantially all of the remaining assets of the Company’s
Drilling Technologies segment to Galleon Mining Tools, Inc.
for $1.0 million in cash consideration and a note receivable of
$1.0 million due in one year.
Upon completion of these sales, the Company ceased all
operations for the Drilling Technologies segment.
Results for 2016 compared to 2015—Drilling Technologies
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
for
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.
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 amount 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
26
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
and administrative cost reductions throughout the year,
including employee related expenses and reduced travel costs.
Production Technologies
(dollars in thousands)
Revenue
Loss from operations
Loss from operations - excluding impairment
Operating margin % - excluding impairment
2017
Year ended December 31,
2016
2015
$
$
$
4,002
(1,357)
(1,357)
(33.9)%
$
$
$
8,292
(8,814)
(4,901)
(59.1)%
$
$
$
12,281
(4,111)
(3,307)
(26.9)%
Results for 2017 compared to 2016—Production
Technologies
Sequentially, revenue increased by 5.3% in the fourth quarter
2016, compared to third quarter 2016.
On May 23, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
liabilities and obligations of the Company’s Production
Technologies segment to Raptor Lift Solutions, LLC (“Raptor
Lift”) for $2.9 million in cash consideration.
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.
Upon completion of this sale, the Company ceased all
operations for the Production Technologies segment.
Results for 2016 compared to 2015—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.
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 2017, the Company
funded capital requirements primarily with cash on hand and
debt financing.
The Company’s primary source of debt financing is its $75
million Credit Facility with PNC Bank. This Credit Facility
contains provisions for a revolving credit facility secured by
substantially all of the Company’s domestic real and personal
property, including accounts receivable, inventory, land,
buildings, equipment, and other intangible assets. As of
December 31, 2017, the Company had $28.0 million in
outstanding borrowings under the revolving debt portion of
the Credit Facility. At December 31, 2017, the Company was
in compliance with all debt covenants. Significant terms of
the Credit Facility are discussed in Note 12 – “Long-Term
27
Debt and Credit Facility” in Part II, Item 8 – “Financial
Statements and Supplementary Data” of this Annual Report.
At December 31, 2017, the Company remained compliant
with the continued listing standards of the NYSE.
Cash and cash equivalents
totaled $4.6 million at
December 31, 2017. The Company generated $17.1 million
of cash inflows from continuing operations (net of $3.8 million
expended in working capital). Offsetting these cash inflows,
the Company used $9.0 million for capital expenditures, $20.4
million for repayments of debt, net of borrowings, $5.2 million
for the repurchase of common stock, and $1.7 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 $12 million and $16
million for committed and planned capital expenditures in
2018. During 2018, the Company plans to use internally
generated funds and, if necessary, borrowings under the
revolving line of credit to fund operations and capital
expenditures. Any excess cash generated may be used to pay
down the level of debt or be retained for future use. The
Company will continue to invest capital into what it believes
to be attractive economic returning opportunities for its
shareholders. This includes the potential for share repurchases
as approved by the Board of Directors in June 2015.
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, 2017 December 31, 2016
Cash and cash equivalents
Current portion of long-term debt
Long-term debt, less current portion
Net debt
$
$
$
4,584
(27,950)
—
(23,366) $
4,823
(40,566)
(7,833)
(43,576)
Cash Flows
Cash flow metrics from the consolidated statements of cash flows are as follows (in thousands):
Year ended December 31,
2016
2015
2017
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash (used in) provided by financing activities
Net cash flows provided by (used in) discontinued operations
Effect of changes in exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
$
$
$
17,131
9,740
(27,285)
24
151
(239) $
2,054
(22,281)
22,851
(6)
(3)
2,615
$
$
25,472
(17,005)
(7,349)
—
(176)
942
Operating Activities
During 2017, 2016, and 2015, cash from operating activities
totaled $17.1 million, $2.1 million, and $25.5 million,
respectively. Consolidated net loss for 2017 totaled $13.1
million, compared to consolidated net income of $1.9 million
and $7.2 million for 2016 and 2015, respectively.
Net non-cash contributions to net income in 2017, totaled
$26.4 million. Contributory non-cash
items consisted
primarily of $12.6 million for depreciation and amortization
expense, $11.2 million for stock compensation expense, $2.0
million for reduction in incremental tax benefit related to
share-based awards, $0.2 million for changes to deferred
income taxes, and $0.1 million for provisions related to
accounts receivables.
Net non-cash contributions to net income in 2016, totaled $6.3
million. Contributory non-cash items consisted primarily of
$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
28
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.
During 2017, changes in working capital provided $3.8
million in cash, primarily resulting from decreasing accounts
receivables, income taxes receivable, and other current assets
by $21.6 million and increasing accrued liabilities and interest
payable by $8.2 million, partially offset by increasing
inventories by $17.3 million and decreasing accounts payable
by $8.7 million.
During 2016, changes in working capital used $6.1 million in
cash, primarily
increasing accounts
receivables, inventories, income taxes receivable, and other
resulting
from
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.
During 2015, changes in working capital provided $5.0
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 $13.4 million, partially offset by increasing
inventories and income taxes receivable by $14.6 million and
decreasing accounts payable by $7.7 million.
Investing Activities
Net cash provided by investing activities was $9.7 million
during 2017. Cash provided by investing activities primarily
included $18.5 million of proceeds received from the sale of
the Drilling Technologies and Production Technologies
segments and $0.7 million of proceeds received from the sale
of fixed assets, partially offset by $9.0 million for capital
expenditures and $0.5 million for the purchase of various
patents and other intangible assets.
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.
Financing Activities
Net cash used in financing activities was $27.3 million during
2017, primarily due to using $20.4 million for repayments of
debt, net of borrowings, $5.2 million for the repurchase of
common stock, $1.7 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 $0.6 million for payments of debt issuance costs. Cash
used in financing activities was partially offset by receiving
$0.7 million in proceeds from the sale of common stock.
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
to stock-based
from
compensation of $1.3 million, and proceeds from the sale of
common stock of $0.9 million.
tax benefit related
the excess
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,
2017, 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.
Contractual Obligations
Cash flows from operations are dependent on a variety of
factors, including fluctuations in operating results, accounts
receivable collections, inventory management, and the timing
of payments for goods and services. Correspondingly, the
impact of contractual obligations on the Company’s liquidity
and capital resources in future periods is analyzed in
conjunction with such factors.
Material contractual obligations consist of repayment of
amounts borrowed under the Company’s Credit Facility and
payment of operating lease obligations.
29
Contractual obligations at December 31, 2017 are as follows (in thousands):
Payments Due by Period
Borrowings under revolving credit facility (1)
Operating lease obligations
Total
Total
Less than
1 year
$
$
27,950
21,806
49,756
$
$
27,950
2,734
30,684
1 - 3 years
$
— $
4,603
4,603
$
$
3 -5 years
More than
5 years
— $
3,961
3,961
$
—
10,508
10,508
(1) The borrowing is classified as current debt. The weighted-average interest rate was 4.48% at December 31, 2017.
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
Drilling Technologies
and Production 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 and Consumer and Industrial
Chemistry 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
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.
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.
30
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, 2017, the allowance was 1.6% of
gross accounts receivable, compared to an allowance of 1.4%
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 amount 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
31
assumptions, impairment losses could be realized in future
periods.
At December 31, 2017 and 2016, the Company recorded an
impairment for all inventory items identified as excess and
obsolete inventory.
Business Combinations
The Company allocates
the fair value of purchase
consideration to the assets acquired, liabilities assumed, and
any non-controlling interests in the acquired entity generally
based on their fair values at the acquisition date. The excess
of the fair value of purchase consideration over the fair value
of these assets acquired, liabilities assumed, and any non-
controlling interests in the acquired entity is recorded as
goodwill. The primary items that generate goodwill include
the value of the synergies between the acquired company and
Flotek and the 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, 2017, two reporting units have a goodwill
balance: Energy Chemistry Technologies and Consumer and
Industrial Chemistry Technologies.
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 impairment test is
performed to determine whether goodwill impairment exists
at the reporting unit.
Effective during the fourth quarter of 2017, the Company
adopted Accounting Standards Update (“ASU”) 2017-04,
“Simplifying the Test for Goodwill Impairment,” which
eliminated the second step of the two-step quantitative
impairment test. Now, if quantitative impairment testing is
performed, the Company compares 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 carrying amount of a reporting unit, including
goodwill, exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess, limited to the
amount of goodwill allocated to that reporting unit.
Prior to adoption of ASU 2017-04, if quantitative impairment
testing was performed, the Company used a two-step
quantitative impairment test to determine whether goodwill
impairment exists at the reporting unit. The first step was 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 used 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 was less than its carrying amount, the second step of the
impairment test was 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 exceeded its implied value, an impairment loss was
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 2017, the
Company first assessed qualitative factors to determine
whether it was necessary to perform the quantitative
impairment test. During annual goodwill impairment testing
in 2016 and 2015, the Company first assessed qualitative
factors to determine whether it was necessary to perform the
two-step goodwill impairment test.
and
and Consumer
As of the fourth quarter of 2017, 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
(“ECT”)
Industrial Chemistry
Technologies (“CICT”) reporting units exceeded the carrying
amount of the respective reporting units. Therefore, the
Company performed a quantitative impairment test for each
of these reporting units. The results of the impairment test
indicated that the estimated fair values of the two reporting
units exceeded the carrying amount of their respective
reporting units by approximately $34.7 million and $20.2
million, respectively, or an excess of 21% and 23%,
respectively, over the carrying amount. Therefore, no
impairment was deemed necessary for 2017. To evaluate the
sensitivity of the fair value calculations of the ECT and CICT
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 ECT
and CICT reporting units by approximately $23.7 million and
$12.4 million, respectively. These sensitivity analyses were
not indicative of an impairment for the ECT and CICT
reporting units.
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:
32
• Revenue and expenses grow 2% annually;
• Margins stay in the lower portion of historical ranges;
• Working capital ratios remain consistent with historical
levels;
• Risk premium related to foreign country security,
government stability, and potential future foreign
currency.
Based on the Company’s fourth quarter 2017 testing of
goodwill for
impairment at each reporting unit, no
impairments were recorded.
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 improve throughout 2017 and 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
Production Technologies reporting units exceeded
the
carrying amount of the respective reporting units, as of the
fourth quarter of 2016. 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 amount 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 amount. 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
the Energy Chemistry
Technologies
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%
33
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 amount 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 amount 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 amount. 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 amount 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 amount 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 amount. 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 amount 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 amount of
the reporting unit by approximately $8.1 million, or an excess
of 36.9% over the carrying amount. 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;
•
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
impairment at each reporting unit, no
goodwill for
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
the operating
Technologies segment (deterioration
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 amount 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 amount 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
amount. 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
34
less than the carrying amount 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 amount of the
goodwill for the Teledrift reporting unit by approximately $2.0
million, or an excess of 15% over the carrying amount. To
evaluate the sensitivity of the fair value calculation for
the Teledrift 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.
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 amount of these assets, including
amounts to be capitalized, depreciation and amortization
methods to be applied, estimated useful lives, and possible
impairments. Property and equipment and intangible assets
with determinable lives are tested for impairment whenever
events or changes in circumstances indicate the carrying
amount 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 amount 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
35
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
36
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
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
amount 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 amount 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 amount 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.
published external, perspectives of recovery timing. Key
assumptions used in the recoverability test included:
• Rental tools are the primary cash generating assets for
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
the
indicated
segment.
undiscounted estimated cash flows for the segment exceeded
the carrying amount 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.
The recoverability
that
test
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 amount 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
37
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 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 2017, 2016, and 2015, 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
2017.
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.
38
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
the recent
preceding years. The Company considers
cumulative income or loss position of its filings groups as
objectively verifiable evidence for the projection of future
income, which consists primarily of determining the average
of the pre-tax income of the current and prior two years after
adjusting for certain
indicative of future
items not
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, 2017, 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
estimate, stock-based compensation expense is adjusted
accordingly.
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.
Loss Contingencies
Recent Accounting Pronouncements
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,
Recent accounting pronouncements which may impact the
Company are described in Note 2 – “Summary of Significant
Accounting Policies”
in Part II, Item 8 – “Financial
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 4.50% at
December 31, 2017, and would have permitted borrowing at
rates ranging between 6.00% and 6.50%. 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, 2017, $28.0 million was outstanding under the
revolving credit facility, with $6.0 million borrowed as base
rate loans at an interest rate of 6.00% and $22.0 million
borrowed as LIBOR loans at an interest rate of 4.07%.
The amount borrowed under the term loan was reset to $10.0
million as of September 30, 2016. Monthly principal
39
payments of $0.2 million were required. On May 22, 2017,
the Company repaid the outstanding balance of the term loan.
Foreign Currency Exchange Risk
is primarily
The Company presently has limited exposure to foreign
currency risk. As a global company, Flotek operates in over
20 domestic and international markets. Flotek’s functional
the U.S. dollar. During 2017,
currency
approximately 2.0% 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. Tropical storms and
hurricanes, as experienced during 2017, can also impact the
future citrus crop yields in growing regions. 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, where applicable. The Company
presently does not have any commodity futures contracts but
may consider utilizing forms of hedging from time to time in
the 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. The Company believes its
inventory and supply agreements are well positioned to meet
market needs at this time. Although there are international,
publicly traded exchanges for guar seed, the Company
presently does not have any futures contracts.
40
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Flotek Industries, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Flotek Industries, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material
respects, effective control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework 2013 issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheet of Flotek Industries, Inc. and subsidiaries as of December 31, 2017, the related
consolidated statements of operations, comprehensive income (loss), equity and cash flows for the year then ended, and the related
notes (collectively referred to as the “consolidated financial statements”) and our report dated March 8, 2018 expressed an
unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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 (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) 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 (3) 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.
/s/ MOSS ADAMS LLP
Houston, Texas
March 8, 2018
We have served as the Company’s independent registered public accounting firm since 2017.
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Flotek Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Flotek Industries, Inc. and subsidiaries (the “Company”) as of
December 31, 2017, the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for
the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of
December 31, 2017, and the consolidated results of their operations and their cash flows for the year ended December 31, 2017,
in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 8, 2018 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ MOSS ADAMS LLP
Houston, Texas
March 8, 2018
We have served as the Company’s independent registered public accounting firm since 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 sheet of Flotek Industries, Inc. and subsidiaries as of December 31, 2016
and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the two
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 the results of their operations and their cash flows for each
of the two years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/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 $733 and
$664 at December 31, 2017 and 2016, respectively
Inventories
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
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Interest payable
Liabilities held for sale
Current portion of long-term debt
Total current liabilities
Long-term debt, less current portion
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; 60,622,986
shares issued and 56,755,293 shares outstanding at December 31, 2017;
59,684,669 shares issued and 56,972,580 shares outstanding at
December 31, 2016
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Treasury stock, at cost; 3,621,435 and 2,028,847 shares at December 31, 2017
and 2016, respectively
Flotek Industries, Inc. stockholders’ equity
Noncontrolling interests
Total equity
TOTAL LIABILITIES AND EQUITY
December 31,
2017
2016
$
4,584
$
4,823
46,018
75,759
2,826
—
9,264
138,451
73,833
56,660
12,713
48,231
329,888
22,048
14,589
43
—
27,950
64,630
—
64,630
$
$
47,152
58,283
12,752
43,900
21,708
188,618
74,691
56,660
12,894
50,352
383,215
29,960
12,170
24
4,961
40,566
87,681
7,833
95,514
—
—
6
336,067
(884)
(37,225)
(33,064)
264,900
358
265,258
329,888
$
6
318,392
(956)
(9,830)
(20,269)
287,343
358
287,701
383,215
$
$
$
See accompanying Notes to Consolidated Financial Statements.
44
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenue
Costs and expenses:
Cost of revenue (excluding depreciation and amortization)
Corporate general and administrative
Segment selling and administrative
Depreciation and amortization
Research and development
Loss (gain) on disposal of long-lived assets
Total costs and expenses
(Loss) income from operations
Other (expense) income:
Interest expense
Gain on legal settlement
Other (expense) income, net
Total other (expense) income
(Loss) income before income taxes
Income tax expense
(Loss) income from continuing operations
Loss from discontinued operations, net of tax
Net loss
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,
2016
2015
2017
$
317,098
$
262,832
$
269,966
215,129
41,492
37,236
12,159
13,645
292
319,953
(2,855)
(2,168)
—
812
(1,356)
(4,211)
(8,842)
(13,053)
(14,342)
(27,395) $
(0.23) $
(0.25)
(0.48) $
(0.23) $
(0.25)
(0.48) $
170,255
43,745
36,405
10,429
9,320
(18)
270,136
(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) $
172,033
38,623
31,653
8,735
6,657
(13)
257,688
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)
$
$
$
$
$
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
57,580
56,087
54,459
57,580
56,350
54,992
See accompanying Notes to Consolidated Financial Statements.
45
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Loss) income from continuing operations
Loss from discontinued operations, net of tax
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustment
Comprehensive loss
Year ended December 31,
2017
2016
2015
(13,053) $
(14,342)
(27,395)
$
1,907
(51,037)
(49,130)
7,158
(20,620)
(13,462)
72
(27,323) $
281
(48,849) $
(735)
(14,197)
$
$
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, 2014
54,634
$
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
Net loss
Foreign currency translation adjustment
Stock issued under employee stock purchase plan
Common stock issued in payment of accrued liability
Stock options exercised
Restricted stock granted
Restricted stock forfeited
Treasury stock purchased
Stock surrendered for exercise of stock options
Stock compensation expense
Repurchase of common stock
Balance, December 31, 2017
—
—
—
768
758
—
—
—
—
—
—
60
—
56,220
$
—
—
2,450
—
114
653
—
—
—
—
—
248
59,685
$
—
—
—
—
663
275
—
—
—
—
—
60,623
$
5
—
—
—
1
—
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
—
—
—
—
—
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
—
—
(113)
—
—
—
122
200
478
—
905
—
—
—
—
—
—
—
(1,729)
(5,863)
—
—
654
188
5,884
—
—
—
—
—
10,949
(5,203)
—
—
72
—
—
—
—
—
—
—
—
—
(27,395)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(27,395)
72
654
188
5,884
—
—
(1,729)
(5,863)
10,949
(5,203)
3,621
$ (33,064)
$
336,067
$
(884)
$
(37,225)
$
358
$ 265,258
See accompanying Notes to Consolidated Financial Statements.
47
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2016
2015
2017
Cash flows from operating activities:
Net loss
Loss from discontinued operations, net of tax
(Loss) income from continuing operations
Adjustments to reconcile (loss) income from continuing operations to net cash provided by
operating activities:
Depreciation and amortization
Amortization of deferred financing costs
Provision for doubtful accounts
Loss (gain) on sale of assets
Stock compensation expense
Deferred income tax provision (benefit)
Reduction in (excess) tax benefit related to share-based awards
Changes in current assets and liabilities:
Accounts receivable, net
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 businesses
Proceeds from sale of assets
Payments for acquisitions, net of cash acquired
Purchase of patents and other intangible assets
Net cash provided by (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 noncontrolling interest
Net cash (used in) provided by financing activities
Discontinued operations:
Net cash (used in) provided by operating activities
Net cash provided by (used in) investing activities
Net cash flows provided by (used in) discontinued operations
Effect of changes in exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$ (27,395) $ (49,130) $ (13,462)
(20,620)
7,158
(51,037)
1,907
(14,342)
(13,053)
12,159
472
113
292
11,172
181
1,989
1,456
(17,291)
8,008
12,153
(8,719)
8,180
—
19
17,131
(8,960)
18,490
689
—
(479)
9,740
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)
(9,833)
383,160
(393,776)
(579)
—
(1,729)
654
(5,203)
21
—
(27,285)
(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)
(684)
708
24
151
(239)
4,823
4,584
$
12
(18)
(6)
(3)
2,615
2,208
4,823
$
1,199
(1,199)
—
(176)
942
1,266
2,208
$
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 chemistries and services to the oil and gas industries,
and high value compounds to companies that make food and
beverages, cleaning products, cosmetics, and other products
that are sold in consumer and industrial markets.
includes specialty
The Company’s oilfield business
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
fragrances markets and
friendly
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 sheet 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.
During 2017, the Company completed the sale or disposal of
the assets and transfer or liquidation of liabilities and
obligations of each of the Drilling Technologies and
Production Technologies segments.
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
49
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
customer circumstances, credit conditions, and historical
write-offs and collections. The Company writes off specific
accounts receivable when they are determined to be
uncollectible.
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 net realizable
value. 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.
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 amount of an asset or asset group may
not be recoverable. Indicative events or circumstances include,
but are not limited to, matters such as a significant decline in
market value or a significant change in business climate. An
50
Year ended December 31,
2016
2015
2017
$
$
664
113
(44)
733
$
$
709
558
(603)
664
$
$
510
367
(168)
709
impairment loss is recognized when the carrying amount 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 amount over its fair value. Assets to be
disposed of are reported at the lower of the carrying amount
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 amount
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 primarily for enterprise-level business and finance
software that is customized to meet the Company’s specific
operational needs. Capitalized costs are included in property
and equipment and are amortized on a straight-line basis over
the estimated useful life of the software beginning when the
software project is substantially complete and placed in
service. Costs incurred during the preliminary project stage
and costs for training, data conversion, and maintenance are
expensed as incurred.
The Company amortizes software costs using the straight-line
method over the expected life of the software, generally 3 to
7 years. The unamortized amount of capitalized software was
$4.0 million at December 31, 2017.
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
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
change in the business climate or a change in the assessment
of future operations of a reporting unit.
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 impairment test is
performed to determine whether goodwill impairment exists
at the reporting unit.
The quantitative impairment test, used to identify both the
existence of impairment and the amount of impairment loss,
compares 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 carrying amount of a
reporting unit, including goodwill, exceeds its fair value, an
impairment loss is recognized in an amount equal to that
excess, limited to the amount of goodwill allocated to that
reporting unit.
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 amount 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 interest charges) is less than the carrying amount,
an impairment loss is recognized. The impairment loss
recognized is the amount by which the carrying amount
exceeds the fair value. Fair value of these assets may be
determined by a variety of methodologies, including
discounted cash flow models.
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 acquisition method. The Company allocates the fair value
of purchase consideration to the assets acquired, liabilities
assumed, and any noncontrolling 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 noncontrolling 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
priority
inputs (level 3). “Level 1”
measurements are measurements using quoted prices in active
markets for identical assets and liabilities. “Level 2”
measurements are measurements using quoted prices in
markets that are not active or that are based on quoted prices
for similar assets or liabilities. “Level 3” measurements are
measurements that use significant unobservable inputs which
require 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. There is typically no right
of return or any significant post-delivery obligations. 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
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
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
52
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as objectively verifiable
evidence for the projection of future income, which consists
primarily of determining the average of the pre-tax income of
the current and prior two years after adjusting for certain items
not indicative of future performance. Based on this analysis,
the Company determines whether a valuation allowance is
necessary.
Historically, U.S. Federal income taxes are not provided on
unremitted earnings of subsidiaries operating outside the U.S.
because it is the Company’s intention to permanently reinvest
undistributed earnings in the subsidiary. These earnings would
become subject to income tax if they were remitted as
dividends or loaned to a U.S. affiliate. Due to the 2017 Tax
Cuts and Jobs Act, U.S. federal transition taxes have been
recorded at December 31, 2017, for a one-time U.S. tax
liability on those earnings which have not previously been
repatriated to the U.S. 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 options, restricted stock awards, and restricted
stock units, 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 amount 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
amount of the disposal group, as long as the new carrying
amount does not exceed the carrying amount 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 $0.2 million, $0.4 million, and
$0.2 million for the years ended December 31, 2017, 2016,
and 2015, 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, 2017, the Company adopted the
accounting guidance
in Accounting Standards Update
(“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. Implementation of
this standard did not have a material effect on the consolidated
financial statements and related disclosures.
Effective January 1, 2017, the Company adopted the
accounting guidance in ASU No. 2015-17, “Balance Sheet
Classification of Deferred Taxes.” This standard eliminated
the requirement for organizations to present deferred tax assets
54
tax
and
assets
and liabilities as current and noncurrent in a classified balance
sheet. Instead, organizations are now required to classify all
deferred
liabilities as noncurrent.
Implementation of this standard did not have a material effect
the consolidated financial statements and related
on
disclosures. The Company
standard
retrospectively and, therefore, prior periods presented were
adjusted.
applied
this
Effective January 1, 2017, the Company adopted the
accounting guidance in ASU No. 2016-09, “Improvements to
Employee Share-Based Payment 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 new
guidance requires excess tax benefits and deficiencies to be
recognized in the income statement rather than in additional
paid-in capital. As a result of applying this change, the
Company recognized a $2.0 million reduction in tax benefit
in the provision for incomes taxes during the year ended
December 31, 2017. The Company applied this standard
prospectively, where applicable, and, therefore, prior periods
presented were not adjusted.
Effective October 1, 2017, the Company adopted the
accounting guidance in ASU No. 2017-04, “Simplifying the
Test for Goodwill Impairment.” This standard eliminates Step
2 from the goodwill impairment test. The Company will now
recognize an impairment charge for the amount by which the
carrying amount exceeds the reporting unit’s fair value.
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
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. 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
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In 2017, the Company formed a project team to evaluate the
new revenue recognition standard. The team has identified the
relevant revenue streams and documented the procedures and
control changes required to address the impacts that ASU
2014-09 may have on its business, as well as trained
appropriate personnel on the procedures and controls going
into effect January 1, 2018. The evaluation efforts included
identifying revenue streams with similar contract structures,
performing a detailed review of key contracts by revenue
stream, and comparing historical policies and practices to the
new standard. From the analysis performed, two main revenue
streams were identified from contracts with customers: (1)
product sales and (2) services. The Company’s revenue
recognition methodology does not materially change by the
adoption of the new standard for product sales (point in time
revenue recognition) and for service contracts (over time),
which principally charge on a day rate basis and are primarily
short-term in nature. Therefore, based on the assessment, the
Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements. The
Company will adopt the new standard effective January 1,
2018, using the full retrospective method.
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.
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 executed a plan to sell or
otherwise dispose of the Drilling Technologies and Production
Technologies segments. An investment banking advisory
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
permitted 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.
and
activities
In January 2017, the FASB issued ASU No. 2017-01,
“Clarifying the Definition of a Business.” This standard
provides additional guidance on whether an integrated set of
assets
a business. The
pronouncement is effective for annual periods beginning after
December 15, 2017, including interim periods within those
periods, with early adoption permitted in specific instances.
The Company is currently evaluating the impact the
pronouncement will have on the consolidated financial
statements and related disclosures.
constitutes
In May 2017, the FASB issued ASU No. 2017-09, “Scope of
Modification Accounting.” This standard provides guidance
about which changes to the terms or conditions of a share-
based payment award require an entity to apply modification
accounting under Topic 718. The pronouncement is effective
for annual periods beginning after December 15, 2017,
including interim periods within those periods, with early
adoption permitted. The Company is currently evaluating the
impact the pronouncement will have on the consolidated
financial statements and related disclosures.
services firm was engaged and actively marketed 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. The
Company has classified the assets, liabilities, and results of
55
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
operations for these two segments as “Discontinued
Operations” for all periods presented.
Disposal of the Drilling Technologies and Production
Technologies reporting segments represented a strategic shift
that would have a major effect on the Company’s operations
and financial results.
On December 30, 2016, the Company sold a portion of its
Drilling Technologies segment and recorded a loss of $1.2
million which is included in the loss from discontinued
operations for the year ended December 31, 2016.
On May 22, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
the Company’s Drilling
liabilities and obligations of
Technologies segment to National Oilwell Varco, L.P.
(“NOV”) for $17.0 million in cash consideration, subject to
normal working capital adjustments, with $1.5 million held
back by NOV for up to 18 months to satisfy potential
indemnification claims.
On May 23, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
liabilities and obligations of the Company’s Production
Technologies segment to Raptor Lift Solutions, LLC (“Raptor
Lift”) for $2.9 million in cash consideration, with $0.4 million
held back by Raptor Lift to satisfy potential indemnification
claims.
On August 16, 2017, the Company completed the sale of
substantially all of the remaining assets of the Company’s
Drilling Technologies segment to Galleon Mining Tools, Inc.
for $1.0 million in cash consideration and a note receivable of
$1.0 million due in one year.
The sale or disposal of the assets and transfer or liquidation of
liabilities and obligations of these segments was completed in
2017. The Company has no continuing involvement with the
discontinued operations.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued
Operations for the years ended December 31, 2017, 2016, and 2015 (in thousands):
Discontinued operations:
Revenue
Cost of revenue
Selling, general and administrative
Depreciation and amortization
Research and development
Gain (loss) on disposal of long-lived assets
Impairment of inventory and long-lived assets
Loss from operations
Other expense
Loss on sale of businesses
Loss on write-down of assets held for sale
Drilling Technologies
Production Technologies
2017
2016
2015
2017
2016
2015
$ 11,534
$ 27,627
$ 52,112
$
4,002
$
8,292
$ 12,281
(7,309)
(6,963)
(18,667)
(35,410)
(15,285)
(21,049)
—
(5)
97
—
(1,714)
(3,240)
(64)
103
(202)
17
(36,522)
(19,568)
(3,236)
(1,759)
—
(364)
—
—
(2,646)
(44,522)
(27,340)
(1,357)
(96)
(1,600)
(6,831)
(412)
(1,199)
(18,971)
(259)
—
—
(52)
(479)
(9,718)
(6,161)
(7,881)
(3,790)
(10,179)
(4,158)
(584)
(888)
(50)
(3,913)
(8,814)
(96)
—
(658)
(596)
3
(804)
(4,111)
(40)
—
—
(4,151)
1,455
Loss before income taxes
(11,173)
(65,104)
(27,599)
(11,606)
(15,071)
Income tax benefit
4,138
23,661
9,675
4,299
5,477
Net loss from discontinued operations
$
(7,035) $ (41,443) $ (17,924) $
(7,307) $
(9,594) $
(2,696)
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, 2017 and 2016 are as follows (in
thousands):
Drilling Technologies
Production Technologies
December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
Assets:
Accounts receivable, net
$
— $
5,072
$
— $
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
—
—
—
—
—
—
—
—
— $
— $
—
— $
9,078
278
—
11,277
15,333
7,395
48,433
(18,971)
29,462
2,472
1,190
3,662
$
$
$
—
—
—
—
—
—
—
—
— $
— $
—
— $
$
$
$
1,784
8,115
370
4,179
3,978
1,689
484
20,599
(6,161)
14,438
914
385
1,299
At December 31, 2017, all remaining assets and liabilities of the discontinued operations were assumed by the Company’s continuing
operations. These balances included $0.3 million of net accounts receivable, $1.4 million of sales price hold-back that will be
received during 2018, and $1.4 million of accrued liabilities to be settled in 2018.
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 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.
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 amount 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 amount 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.
57
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 had the best opportunity for
profitable growth in the future. In addition, the Company
shifted the focus of the Production Technologies segment to
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
58
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
Year ended December 31,
2016
2015
2017
Supplemental non-cash investing and financing activities:
Value of common stock issued in acquisitions
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 (received, net of payments) paid, net of refunds
$
$
— $
188
5,863
3,268
—
50
$
1,851
(10,195)
2,024
333
$
$
1,014
—
1,332
1,398
1,547
Note 7 — Revenue
The Company differentiates revenue and cost of revenue (excluding depreciation and amortization) based on whether the source
of revenue is attributable to products or services. Revenue and cost of revenue (excluding depreciation and amortization) by source
are as follows (in thousands):
Revenue:
Products
Services
Cost of revenue (excluding depreciation and amortization):
Products
Services
Year ended December 31,
2016
2015
2017
$
$
$
$
310,716
6,382
317,098
210,281
4,848
215,129
$
$
$
$
256,263
6,569
262,832
162,488
7,767
170,255
$
$
$
$
258,968
10,998
269,966
164,837
7,196
172,033
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,
2017
2016
$
$
42,682
3,284
29,793
75,759
$
$
28,626
2,918
26,739
58,283
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
2017
2016
2015
$
$
— $
724
(724)
— $
— $
1,301
(1,301)
— $
—
16
(16)
—
During the years ended December 31, 2017, 2016, and 2015, all inventory items identified as excess and obsolete inventory were
charged to costs and expenses.
Note 9 — Property and Equipment
Property and equipment are as follows (in thousands):
Land
Buildings and leasehold improvements
Machinery and equipment
Fixed assets in progress
Furniture and fixtures
Transportation equipment
Computer equipment and software
Property and equipment
Less accumulated depreciation
Property and equipment, net
December 31
2017
2016
$
$
6,724
43,899
41,548
4,298
2,002
2,200
12,181
112,852
(39,019)
73,833
$
$
5,837
42,986
36,187
3,235
1,969
3,059
11,844
105,117
(30,426)
74,691
Depreciation expense totaled $9.5 million, $7.6 million, and $5.8 million for the years ended December 31, 2017, 2016, and 2015,
respectively.
During the years ended December 31, 2017, 2016, and 2015, 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, 2017.
Goodwill is tested for impairment annually in the fourth
quarter, or more frequently if circumstances indicate a
potential impairment. During the fourth quarter of 2017, the
Company adopted ASU 2017-04, which eliminates Step 2
from the goodwill impairment test. If the carrying amount
exceeds the reporting unit’s fair value, the Company will now
recognize an impairment charge for the excess amount. During
annual goodwill impairment testing for the year ended
December 31, 2017, the Company first assessed the qualitative
factors and was unable to conclude that it was not more likely
than not that fair value of the Energy Chemistry Technologies
and Consumer and Industrial Chemistry Technologies
reporting units exceeded the carrying amount of the respective
reporting units. Therefore, the Company performed the
quantitative impairment test for both reporting units. The result
of this testing indicated that the fair value of the Energy
Chemistry Technologies and Consumer and Industrial
Chemistry Technologies reporting units exceeded the carrying
amount, including goodwill, of the respective reporting units.
During annual goodwill impairment testing for the year ended
December 31, 2016, 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 therefore, further testing was not required.
During annual goodwill impairment testing for 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 amount.
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, 2017, 2016, and 2015.
Changes in the carrying amount 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, 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
Activity during the year 2017:
Goodwill impairment recognized
Acquisition goodwill recognized
Balance at December 31, 2017:
Goodwill
Accumulated impairment losses
Goodwill balance, net
$
55,798
—
55,798
—
862
56,660
—
56,660
—
—
56,660
—
56,660
—
862
37,180
—
37,180
—
—
—
—
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 amount:
Other intangible assets, net
$
$
$
December 31,
2017
2016
Cost
Accumulated
Amortization
Cost
Accumulated
Amortization
4,537
6,518
1,069
12,124
117
12,241
$
$
17,310
30,877
1,549
49,736
1,791
51,527
11,630
63,157
48,231
5,586
8,127
1,117
14,830
96
14,926
$
$
$
$
$
16,815
30,877
1,467
49,159
1,804
50,963
11,630
62,593
50,352
Intangible assets acquired are amortized on a straight-line
basis over two to 20 years. Amortization of intangible assets
acquired totaled $2.7 million, $2.8 million, and $3.0 million
for the years end ended December 31, 2017, 2016, and 2015,
respectively.
Amortization of deferred financing costs totaled $0.5 million,
$0.4 million, and $0.3 million for the years ended
December 31, 2017, 2016, and 2015, respectively.
Estimated future amortization expense for other finite lived intangible assets, including deferred financing costs, at December 31,
2017 is as follows (in thousands):
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Other amortizable intangible assets, net
$
$
3,017
2,956
2,929
2,916
2,664
22,119
36,601
During the years ended December 31, 2017, 2016, and 2015, 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,
2017
2016
$
$
$
27,950
—
27,950
(27,950)
— $
38,566
9,833
48,399
(40,566)
7,833
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. The Credit
Facility, as amended, continues in effect until May 10, 2022.
Under terms of the Credit Facility, as amended, the Company
has total borrowing availability of $75 million under a
revolving credit facility. A term loan has been repaid in May
2017 and may not be re-borrowed.
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. In the event of default, PNC Bank may accelerate
the maturity date of any outstanding amounts borrowed under
the Credit Facility.
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) earnings before interest,
taxes, depreciation, and amortization (“EBITDA”), adjusted
for non-cash stock-based compensation and the loss from
discontinued operations, less cash taxes paid during the period
to (b) all debt payments during the period. The fixed charge
coverage ratio requirement began for the quarter ended March
31, 2017 at 1.00 to 1.00 and increased to 1.10 to 1.00 for the
year ended December 31, 2017, and for each fiscal quarter
thereafter. The leverage ratio (funded debt to adjusted
EBITDA) requirement began for the six months ended June
30, 2017 at not greater than 5.50 to 1.00 and reduces to not
greater than 3.00 to 1.00 for the year ending September 30,
2018, and thereafter. The annual limit on capital expenditures
for 2017 was $20 million. The annual limit on capital
expenditures for 2018 and each fiscal year thereafter is $26
million. The annual limit on capital expenditures is reduced if
the undrawn availability under the revolving credit facility
falls below $15 million at any month-end.
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.
Beginning with fiscal year 2017, the Credit Facility includes
a provision that 25% of EBITDA minus cash paid for taxes,
dividends, debt payments, and unfunded capital expenditures,
not to exceed $3.0 million for any year, be paid on the
outstanding balance within 75 days of the fiscal year end. For
the year ended December 31, 2017, there was no additional
payment required based on this provision.
Each of the Company’s domestic subsidiaries is fully obligated
for Credit Facility indebtedness as a borrower or as a guarantor.
(a) Revolving Credit Facility
Under the revolving credit facility, the Company may borrow
up to $75 million through May 10, 2022. This includes a
sublimit of $10 million that may be used for letters of credit.
The revolving credit facility is secured by substantially all of
the Company’s domestic accounts receivable and inventory.
At December 31, 2017, eligible accounts receivable and
inventory securing the revolving credit facility provided total
borrowing capacity of $71.9 million under the revolving credit
facility. Available borrowing capacity, net of outstanding
borrowings, was $43.9 million at December 31, 2017.
The interest rate on advances under the revolving credit facility
varies based on the fixed charge coverage ratio. 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 4.5%
at December 31, 2017. 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, 2017, $28.0 million was outstanding under the
63
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
revolving credit facility, with $6.0 million borrowed as base
rate loans at an interest rate of 6.0% and $22.0 million
borrowed as LIBOR loans at an interest rate of 4.07%.
payments of $0.2 million were required. On May 22, 2017,
the Company repaid the outstanding balance of the term loan.
The term loan may not be re-borrowed.
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
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.
Debt Maturities
At December 31, 2017, borrowing under the revolving credit
facility, which matures on May 10, 2022, is classified a current
debt, and therefore, the entire balance is considered to mature
in 2018.
Liabilities Measured at Fair Value on a Recurring Basis
At December 31, 2017 and 2016, 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,
2017, 2016, and 2015.
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, 2017, 2016, and 2015.
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, 2017 or
2016.
The carrying amount and estimated fair value of the Company’s long-term debt are as follows (in thousands):
December 31,
2017
2016
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Borrowings under revolving credit facility
Term loan
$
$
27,950
—
$
27,950
—
$
38,566
9,833
38,566
9,833
The carrying amount of borrowings under the revolving credit facility and the term loan approximate their fair value because the
interest rate is variable.
64
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Potentially dilutive securities were excluded from the
calculation of diluted loss per share for the year ended
December 31, 2017, since including them would have an anti-
dilutive effect on loss per share due to the loss from continuing
operations incurred during the period. Securities convertible
into shares of common stock that were not considered in the
diluted loss per share calculations were 0.7 million stock
options, before they were converted into common shares
during 2017, and 0.7 million restricted stock units.
Basic and diluted earnings (loss) per common share are as follows (in thousands, except per share data):
(Loss) income from continuing operations
Loss from discontinued operations, net of tax
Net loss - Basic and Diluted
Weighted average common shares outstanding - Basic
Assumed conversions:
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
Year ended December 31,
2016
2017
2015
(13,053) $
(14,342)
(27,395) $
$
1,907
(51,037)
(49,130) $
7,158
(20,620)
(13,462)
57,580
56,087
54,459
—
—
197
66
527
6
57,580
56,350
54,992
(0.23) $
(0.25)
(0.48) $
(0.23) $
(0.25)
(0.48) $
$
0.03
(0.91)
(0.88) $
$
0.03
(0.91)
(0.88) $
0.13
(0.38)
(0.25)
0.13
(0.37)
(0.24)
$
$
$
$
$
$
65
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Income Taxes
Components of the income tax expense are as follows (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Income tax expense
Year ended December 31,
2016
2015
2017
$
$
(1,314) $
675
488
(151)
8,701
337
(45)
8,993
8,842
$
$
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
The components of (loss) income before income taxes are as follows (in thousands):
United States
Foreign
(Loss) income before income taxes
Year ended December 31,
2016
2015
2017
$
$
(2,844) $
(1,367)
(4,211) $
4,502
(1,358)
3,144
$
$
4,760
5,874
10,634
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
Impact of 2017 Tax Cuts and Jobs Act
Net operating loss carryback adjustment
Reduction in tax benefit related to stock-based awards
Non-deductible expenditures
Research and development credit
Other
Effective income tax rate
Year ended December 31,
2016
2015
2017
(35.0)%
14.2
11.6
173.6
—
47.2
11.0
(10.8)
(1.8)
210.0 %
35.0%
(5.3)
1.2
—
10.0
—
13.1
(12.7)
(2.0)
39.3%
35.0%
2.0
(4.4)
—
1.4
—
5.9
(3.5)
(3.7)
32.7%
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax
impact, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income
taxed at different rates. Changes in the effective tax rate during 2017 included the Company implementing ASU No. 2016-09,
which requires accounting for excess tax benefits and tax deficiencies related to stock-based awards as discrete items in the period
in which they occur and the impact of the 2017 Tax Cuts and Jobs Act.
Comprehensive tax reform legislation enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Acts (“2017 Tax
Act”), makes significant changes to U.S. federal income tax laws. The 2017 Tax Act, among other things, reduces the corporate
income tax rate from 35% to 21%, partially limits the deductibility of business interest expense and net operating losses, provides
additional limitations on the deductibility of executive compensation, imposes a one-time tax on unrepatriated earnings from
certain foreign subsidiaries, taxes offshore earnings at reduced rates regardless of whether they are repatriated, and allows the
immediate deduction of certain new investments instead of deductions for depreciation expense over time. The Company has not
completed its determination of the 2017 Tax Act and recorded provisional amounts in its financial statements as of December 31,
66
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2017. The Company recorded a provisional expense for the effects of the 2017 Tax Act of $7.3 million. The effects of the 2017
Tax Act on the Company include three main categories: 1) remeasurement of the net deferred tax assets from 35% to 21%, which
resulted in tax expense of $5.5 million; 2) a one-time tax on unrepatriated earnings from certain foreign subsidiaries of $0.2 million;
and 3) additional limitations on the deductibility of executive compensation, which resulted in tax expense of $1.6 million. The
Company will continue to evaluate the 2017 Tax Act and adjust the provisional amounts as additional information is obtained.
The ultimate impact of the 2017 Tax Act may differ from the provisional amounts recorded due to additional information becoming
available, changes in interpretation of the 2017 Tax Act, and additional regulatory guidance that may be issued.
Deferred income taxes reflect the tax effect of temporary differences between the carrying amount 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
Goodwill
Convertible debt
Unearned revenue
Prepaid insurance and other
Total gross deferred tax liabilities
Net deferred tax assets
December 31,
2017
2016
$
$
24,569
981
827
685
—
222
3,955
—
31,239
(1,187)
30,052
(6,216)
(10,084)
(365)
(619)
(52)
(3)
(17,339)
12,713
$
$
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
As of December 31, 2017, the Company had U.S. net
operating loss carryforwards of $103.8 million, expiring in
various amounts in 2029 through 2036. 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 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.
67
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. No valuation
allowance was recorded against the net federal deferred tax
assets at December 31, 2017, based on the Company’s
determination of its objectively verifiable estimate of future
income. In determining this objectively verifiable future
income, the Company considered income from the most recent
three years adjusted for certain nonrecurring items such as
discontinued operations and stock compensation that will be
nondeductible under the 2017 Tax Act beginning in 2018. As
of December 31, 2017, the Company maintains a valuation
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allowance of $1.2 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, 2017, the Company had
approximately $1.5 million in unremitted earnings outside the
U.S. which were not included for U.S. tax purposes. Due to
the 2017 Tax Act, U.S. federal transition taxes have been
recorded for a one-time U.S. tax liability on these earnings
which have not previously been repatriated to the U.S.
However, certain withholding taxes will need to be paid upon
repatriation. It is not practicable to estimate the amount of the
deferred tax liability on such unremitted earnings.
The Company has performed an evaluation and concluded
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,
2017, which are the years ended December 31, 2014 through
December 31, 2017 for U.S. federal taxes and the years ended
December 31, 2013 through December 31, 2017 for state tax
jurisdictions.
At December 31, 2017, the Company had no unrecognized tax
benefits.
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 — Common Stock
The Company’s Certificate of Incorporation, as amended November 9, 2009, authorizes the Company to issue up to 80 million
shares of common stock, par value $0.0001 per share, and 100,000 shares of one or more series of preferred stock, par value
$0.0001 per share.
A reconciliation of the changes in common shares issued is as follows:
Shares issued at the beginning of the year
Issued in sale of common stock
Issued in acquisition
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,
2016
2017
59,684,669
—
—
—
275,029
663,288
60,622,986
56,220,214
2,450,339
247,764
20,000
632,240
114,112
59,684,669
Stock-Based Incentive Plans
Stock Options
Stockholders approved long term incentive plans in 2014,
2010, and 2007 (the “2014 Plan,” the “2010 Plan,” and the
“2007 Plan,” respectively) under which the Company may
grant equity awards to officers, key employees, non-employee
directors, and service providers 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, 2017, the
Company had a total of 0.3 million shares remaining to be
granted under the 2014 Plan and 2010 Plan. Shares may no
longer be granted under the 2007 Plan.
All stock options are granted with an exercise price equal to
the market value of the Company’s common stock on the date
of grant. Options expire no later than ten years from the date
of grant and generally vest in four years or less. Proceeds
received from stock option exercises are credited to common
stock and additional paid-in capital, as appropriate. The
Company uses historical data to estimate pre-vesting option
forfeitures. Estimates are adjusted when actual forfeitures
differ from the estimate. Stock-based compensation expense
is recorded for all equity awards expected to vest.
68
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2017, 2016, and 2015.
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, 2017 is as follows:
Options
Outstanding as of January 1, 2017
Exercised
Forfeited
Expired
Outstanding as of December 31, 2017
Shares
$
663,288
(663,288)
—
—
— $
Weighted-
Average
Exercise
Price
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic Value
8.87
8.87
—
—
—
0.00
$
—
The total intrinsic value of stock options exercised during the
years ended December 31, 2017, 2016, and 2015 was $2.3
million, $1.0 million, and $8.4 million, respectively. No stock
options vested during the years ended December 31, 2017,
2016, and 2015.
At December 31, 2017, the Company had no remaining
outstanding 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
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, 2017,
100% of the restricted shares granted were time-vesting and
none were performance-based. Grantees of restricted shares
retain voting rights for the granted shares.
restricted shares are
Restricted stock share activity for the year ended December 31, 2017 is as follows:
Restricted Stock Shares
Non-vested at January 1, 2017
Granted to employees
Granted to service provider
Vested
Forfeited
Non-vested at December 31, 2017
69
Weighted-
Average Fair
Value at Date of
Grant
15.92
10.62
9.34
14.63
17.48
12.24
Shares
683,242
260,029
15,000
(590,027)
(121,986)
246,258
$
$
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average grant-date fair value of restricted stock
granted during the years ended December 31, 2017, 2016, and
2015 was $10.62, $11.92, and $16.15 per share, respectively.
The total fair value of restricted stock that vested during the
years ended December 31, 2017, 2016, and 2015 was $8.6
million, $15.4 million, and $13.7 million, respectively.
At December 31, 2017, there was $1.7 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 0.9 years.
Restricted Stock Units
During the year ended December 31, 2017, the Company
granted performance-based restricted stock units (“RSUs”) for
604,682 shares equivalents. The performance period for these
share equivalents continues until December 31, 2018.
During the year ended December 31, 2016, the Company
granted performance-based RSUs
for 768,393 share
equivalents, which had a performance period through
December 31, 2017. RSUs earned, which will be converted to
252,405 RSAs in 2018, will vest on December 31, 2018.
Restricted stock unit share activity for the year ended December 31, 2017 is as follows:
Restricted Stock Unit Shares
RSU share equivalents at January 1, 2017
2016 share equivalents forfeited
2016 share equivalents not earned
2016 share equivalents
2017 share equivalents granted
2017 share equivalents forfeited
RSU share equivalents at December 31, 2017
Weighted-
Average Fair
Value at Date of
Grant
12.02
12.02
12.02
12.02
18.70
18.48
16.41
Shares
768,393
(263,585)
(252,403)
252,405
604,682
(131,756)
725,331
$
$
At December 31, 2017, there was $8.5 million of unrecognized
compensation expense related to 2017 and 2016 restricted
stock units. The unrecognized compensation expense is
expected to be recognized over a weighted-average period of
1.7 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, $0.1 million, and $0.2 million
during the years ended December 31, 2017, 2016, and 2015,
respectively. The total fair value of the shares purchased under
the plan during the years ended December 31, 2017, 2016, and
2015 was $0.8 million, $1.0 million, and $1.0 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
restricted stock, restricted stock unit grants, and stock
purchased under the Company’s ESPP was $11.2 million,
$12.1 million, and $13.1 million during the years ended
December 31, 2017, 2016, and 2015, 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,
2017, 2016, and 2015, the Company purchased 199,644
shares, 238,216 shares, and 473,304 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, 2017, 2016, and 2015, shares surrendered
for the exercise of stock options were 478,287, 3,225, and
70
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
106,810, respectively. These surrendered shares are also
accounted for as treasury stock.
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.
Through December 31, 2017, the Company has repurchased
$25 million of its common stock under this authorization.
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 the
open market or through privately negotiated transactions.
Through December 31, 2017, the Company has repurchased
$0.3 million of its common stock under this authorization.
During the year ended December 31, 2017, the Company
repurchased 905,000 shares of its outstanding common stock
on the open market at a cost of $5.2 million, inclusive of
transaction costs, or an average price of $5.75 per share.
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.
At December 31, 2017, the Company has $49.7 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, 2017, this covenant limits additional share
repurchases to $9.7 million.
Note 17 — Commitments and Contingencies
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern
District of Texas granted the Company’s motion to dismiss the
four consolidated putative securities class action lawsuits that
were filed in November 2015, against the Company and certain
of its officers. The lawsuits were previously consolidated into
a single case, and a consolidated amended complaint had been
filed. The consolidated amended complaint asserted 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 sought 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. The lead plaintiff appealed the
District Court’s decision granting the motion to dismiss.
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.
The Company believes the lawsuits are without merit and
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, as previously disclosed, the U.S. Securities and
Exchange Commission had opened an inquiry related to
similar issues to those raised in the above-described litigation.
On August 21, 2017, the Company received a letter from the
staff of the SEC stating that the inquiry has been concluded
and that the staff does not intend to recommend an enforcement
action against the Company.
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
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, 2017 are as follows (in
thousands):
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
71
Minimum Lease
Payments
$
$
2,734
2,434
2,169
1,973
1,988
10,508
21,806
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense under operating leases totaled $2.9 million, $3.3
million, and $2.6 million during the years ended December 31,
2017, 2016, and 2015, 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, 2017, 2016, and 2015,
compensation expense included $1.0 million, $1.0 million and
$1.0 million, respectively, related to the Company’s 401(k)
match.
Note 18 — 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, and stimulation. In addition, the
in specialized
Company’s chemistries are used
enhanced and
recovery markets.
Activities in this segment also include construction and
management of automated material handling facilities
improved oil
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.
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
2017
Net revenue from external customers
Income (loss) from operations
Depreciation and amortization
Capital expenditures
2016
Net revenue from external customers
Income (loss) from operations
Depreciation and amortization
Capital expenditures
2015
Net revenue from external customers
Income (loss) from operations
Depreciation and amortization
Capital expenditures
$
$
$
$
$
$
243,106
33,611
7,323
3,279
188,233
29,014
5,935
10,674
213,592
43,902
4,791
12,803
$
$
$
73,992
7,465
2,391
4,763
74,599
9,664
2,257
888
56,374
8,742
2,202
568
— $
(43,931)
2,445
918
— $
(45,982)
2,237
2,398
— $
(40,366)
1,742
3,020
317,098
(2,855)
12,159
8,960
262,832
(7,304)
10,429
13,960
269,966
12,278
8,735
16,391
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
December 31, 2017
December 31, 2016
$
$
177,797
$
116,600
35,491
329,888
—
329,888
$
184,328
98,105
56,882
339,315
43,900
383,215
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,
2016
2015
2017
$
$
259,610
57,488
317,098
$
$
210,890
51,942
262,832
$
$
227,117
42,849
269,966
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,
2016
15.7%
13.2%
6.9%
2015
17.2%
14.6%
10.6%
2017
12.8%
8.9%
4.0%
Approximately 95% of the revenue from major customers noted above was from the Energy Chemistry Technologies segment.
$
$
Note 19 — Quarterly Financial Data (Unaudited)
2017
Revenue (1)
Income (loss) from operations (1)
Loss from continuing operations (1)
Income (loss) from discontinued operations, net of tax
Net loss
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
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
(in thousands, except per share data)
$
79,954
(623)
$
85,177
(1,252)
$
79,458
(3,103)
72,509
2,123
$ 317,098
(2,855)
(743) $
(11,235)
$ (11,978) $
(1,122) $
(2,704)
(3,826) $
(3,421) $
319
(3,102) $
(7,767) $ (13,053)
(14,342)
(8,489) $ (27,395)
(722)
$
$
$
$
(0.01) $
(0.19)
(0.20) $
(0.01) $
(0.19)
(0.20) $
(0.02) $
(0.05)
(0.07) $
(0.02) $
(0.05)
(0.07) $
(0.06) $
0.01
(0.05) $
(0.06) $
0.01
(0.05) $
(0.14) $
(0.01)
(0.15) $
(0.14) $
(0.01)
(0.15) $
(0.23)
(0.25)
(0.48)
(0.23)
(0.25)
(0.48)
(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
2016
Revenue (1)
Income (loss) from operations (1)
Income (loss) from continuing operations (1)
Loss from discontinued operations, net of tax
Net loss
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
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
(in thousands, except per share data)
$
63,812
368
64,079
156
$
$
64,337
(2,253)
70,604
(5,575)
$ 262,832
(7,304)
(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.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
As previously reported, effective November 16, 2017, Hein
& Associates LLP (“Hein”), the independent registered public
accounting firm for Flotek Industries, Inc. (the “Company”),
combined with Moss Adams LLP (“Moss Adams”). As a result
of this transaction, on November 16, 2017, Hein resigned as
the independent registered public accounting firm for the
Company. Concurrent with such resignation, the Company’s
audit committee approved the engagement of Moss Adams as
the new independent registered public accounting firm for the
Company.
The audit reports of Hein on the Company’s financial
statements for the years ended December 31, 2016 and 2015
did not contain an adverse opinion or a disclaimer of opinion,
and were not qualified or modified as to uncertainty, audit
scope or accounting principles.
During the two most recent fiscal years ended December 31,
2016 and through the subsequent interim period preceding
Hein’s resignation, there were no disagreements between the
Company and Hein on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedures which, if not resolved to the satisfaction of Hein,
would have caused them to make reference thereto in their
reports on the Company’s financial statements for such years.
In addition, during the periods identified above, there were no
reportable events within the meaning set forth in Item 304(a)
(1)(v) of Regulation S-K.
During the two most recent fiscal years ended December 31,
2016 and through the subsequent interim period preceding
Moss Adams’ engagement, the Company did not consult with
Moss Adams on either (1) the application of accounting
principles to a specified transaction, either completed or
proposed; or the type of audit opinion that may be rendered
on the Company’s financial statements, and Moss Adams did
not provide either a written report or oral advice to the
Company that Moss Adams concluded was an important factor
considered by the Company in reaching a decision as to the
accounting, auditing, or financial reporting issue; or (2) any
matter that was either the subject of a disagreement, as defined
in Item 304(a)(1)(iv) of Regulation S-K, or a reportable event,
as defined in item 304(a)(1)(v) of Regulation S-K.
75
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, 2017,
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, 2017.
Item 9B. Other Information.
None.
Management’s Report on Internal Control over Financial
Reporting
including
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as defined in Rule 13a-15(f) of the Exchange Act.
the principal
The Company’s management,
executive and principal financial officers, assessed the
effectiveness of internal control over financial reporting as of
December 31, 2017, 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, 2017.
The effectiveness of the Company’s internal control over
financial reporting as of December 31, 2017 has been audited
by Moss Adams 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, 2017 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 2018 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 2018 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 2018 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 2018 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 2018 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
3.4
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
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).
Second Amended and Restated Bylaws, dated October 11, 2017 (incorporated by reference to Exhibit 3.1 to the
Company’s Form 8-K filed on October 17, 2017).
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).
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).
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 and 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).
2014 Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company’s Definitive Proxy
Statement filed on April 18, 2014).
Fifth Amended and Restated Service Agreement, dated as of April 15, 2014, between the Company, Protechnics
II, Inc. and Chisholm Management, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K
filed on April 21, 2014).
Letter Agreement, dated as of April 15, 2014, between the Company and John Chisholm (incorporated by reference
to Exhibit 10.2 to the Company’s Form 8-K filed on April 21, 2014).
78
Exhibit
Number
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
21
23.1
23.2
31.1
31.2
32.1
32.2
Exhibit Title
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 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 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).
Retirement Agreement, dated February 14, 2017, between Robert M. Schmitz and the Company (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 17, 2017).
Retirement Agreement, dated February 16, 2017, between Steve Reeves and the Company (incorporated by
reference to Exhibit 10.2 to the Company’s Form 8-K filed on February 17, 2017).
Letter Agreement, dated February 13, 2017, among the Company, Protechnics II, Inc. and Chisholm Management,
Inc. amending the Fifth Amended and Restated Service Agreement among such parties (incorporated by reference
to Exhibit 10.3 to the Company’s Form 8-K filed on February 17, 2017).
Seventh Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement and Sixth
Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated effective as
of March 31, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 1, 2017).
Asset Purchase Agreement, dated May 2, 2017, by and among National Oilwell DHT, L.P., Dreco Energy Services
ULC, and National Oilwell Varco, L.P., the buyers, Teledrift Company, Turbeco, inc., Flotek Technologies ULC,
and Flotek Industries FZE, the sellers, and Flotek Industries, Inc (incorporated by reference to Exhibit 10.2 to the
Company’s Form 10-Q for the quarter ended June 30, 2017).
Eighth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated
effective as of June 7, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter
ended September 30, 2017).
Ninth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated effective
as of July 1, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended
September 30, 2017).
Tenth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated effective
as of September 29, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October
3, 2017).
Employment Agreement, dated effective April 1, 2016, between the Company and Robert Bodnar (incorporated
by reference to Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended September 30, 2017).
Confidential Severance and Release Agreement, dated effective October 12, 2017, between the Company and
Robert Bodnar (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended
September 30, 2017).
* List of Subsidiaries.
* Consent of Moss Adams LLP.
* 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.
79
Exhibit
Number
Exhibit Title
101.SCH + XBRL Schema Document.
101.CAL + XBRL Calculation Linkbase Document.
101.LAB + XBRL Label Linkbase Document.
101.PRE + XBRL Presentation Linkbase Document.
101.DEF + XBRL Definition Linkbase Document.
*
**
+
Filed herewith.
Furnished with this Form 10-K, not filed.
Filed electronically with this Form 10-K.
80
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: March 8, 2018
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/ H. RICHARD WALTON
H. Richard Walton
/s/ KENNETH T. HERN
Kenneth T. Hern
/s/ JOHN S. REILAND
John S. Reiland
/s/ L.V. “BUD” MCGUIRE
L.V. “Bud” McGuire
/s/ L. MELVIN COOPER
L. Melvin Cooper
/s/ CARLA S. HARDY
Carla S. Hardy
/s/ TED D. BROWN
Ted D. Brown
/s/ MICHELLE M. ADAMS
Michelle M. Adams
President, Chief Executive Officer, and Chairman of the Board
March 8, 2018
March 8, 2018
March 8, 2018
March 8, 2018
March 8, 2018
March 8, 2018
March 8, 2018
March 8, 2018
March 8, 2018
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
81
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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
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
Flotek Flavor & Fragrance, LLC
Delaware Limited Liability Company
FC Pro, LLC
Panama Limited Liability Company
Delaware 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 Energetic Foundation - Making a Difference
Texas Nonprofit Corporation
Eclipse IOR Services, LLC
Texas Limited Liability Company
SiteLark, LLC
Texas Limited Liability Company
Flotek Gulf, LLC
Omani Limited Liability Company
Flotek Gulf Research, LLC
Omani Limited Liability Company
Flotek Industries 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
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements filed on Form S-8 (Nos. 333-157276, 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, 333-212864 and 333-219618) of Flotek Industries, Inc. and subsidiaries of our reports
dated March 8, 2018, relating to the consolidated financial statements and the effectiveness of internal control over financial
reporting of Flotek Industries, Inc. and subsidiaries, which reports appear in the Form 10-K of Flotek Industries, Inc. and subsidiaries
for the year ended December 31, 2017 and expresses an unqualified opinion, and to the reference to our firm under the heading
"Experts" in such Registration Statements.
EXHIBIT 23.1
/s/ Moss Adams LLP
Houston, Texas
March 8, 2018
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements filed on Form S-8 (Nos. 333-157276, 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, 333-212864 and 333-219618) 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, 2017.
We also consent to the reference to our firm under the heading “Experts” in such Registration Statements.
EXHIBIT 23.2
/s/ Hein & Associates LLP
Houston, Texas
March 8, 2018
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: March 8, 2018
/s/ JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer and
Chairman of the Board
Exhibit 31.2
I, H. Richard Walton, 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: March 8, 2018
/s/ H. RICHARD WALTON
H. Richard Walton
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,
2017, 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: March 8, 2018
/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,
2017, 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: March 8, 2018
/s/ H. RICHARD WALTON
H. Richard Walton
Executive Vice President and
Chief Financial Officer
FLOTEK
INDUSTRIES
ANNUAL MEETING
Friday, April 27, 2018
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”.
AUDITORS
Moss Adams LLP
500 Dallas St., Suite 2500
Houston, TX 77002
713-850-9814
2018 BOARD OF
DIRECTORS*
John W. Chisholm,
Chairman of the Board
Kenneth T. Hern, Lead Director
Member, Governance & Nominating
Committee
Member, Compensation Committee
Member, Audit Committee
Michelle M. Adams, Director
Chairwoman, Compensation
Committee
Member, Governance & Nominating
Committee
Ted D. Brown, Director
Chairman, Governance & Nominating
Committee
Member, Compensation Committee
L. Melvin Cooper, Director
Chairman, Audit Committee
Member, Governance & Nominating
Committee
Member, Compensation Committee
L.V. “Bud” McGuire, Director
Member, Governance & Nominating
Committee
Member, Compensation Committee
*Effective April 27, 2018