Flotek Industries, Inc. Announces Third Quarter 2018 Results

HOUSTON, Nov. 6, 2018 /PRNewswire/ -- Flotek Industries, Inc. ("Flotek" or the "Company") (NYSE: FTK) today announced results for the three and nine months ended September 30, 2018. 

"The third quarter showed material improvement over the first half of this year as our full-fluids Prescriptive Chemistry Management^® ("PCM^®") business continued to expand, diligent cost cutting measures were furthered and we executed upon the largest single Complex nano-Fluid^® ("CnF^®") order in Company history. Additionally, we delivered consolidated incremental adjusted EBITDA margins of 51% sequentially in the third quarter, in sharp contrast to our disappointing start to the year. As we committed to in the last quarter, our leadership team continues to make steady progress toward increasing our profitability," said John Chisholm, Flotek's Chairman, President and Chief Executive Officer.

"During the quarter, domestic shale operators generally reduced activity. At the same time, they increased their focus on understanding mechanical limitations of proppant loading and lateral lengths to optimize completion techniques and reservoir performance, which we believe play into Flotek's reservoir-centric chemistry offering. Further, as operators prioritize capital efficiency to deliver positive free cash flow, Flotek is providing value-added chemistry technology that delivers higher production at a variety of price points. Meanwhile, there has been increased direct operator interaction as we help address significant reservoir challenges by fine-tuning fluid systems through our chemistry applications. Additionally, we are aligning with service companies that have taken an approach to differentiate themselves through chemistry technology and in turn, can benefit from greater horsepower efficiencies in proppant delivery.

"Impacting Florida Chemical, which is our Consumer and Industrial Chemistry Technologies ("CICT") segment, global citrus markets remained in a state of undersupply during the quarter relative to historical averages. However, the potential for greater crop yields points to the prospect of relief from the inflationary cost environment of the last couple of years. There has been a considerable increase in consumer demand for natural flavors and fragrances, leading to growing market opportunities for our high-margin compounds."

Key accomplishments during the quarter include some of the updates below:

• Cash Selling, General and Administrative ("SG&A") expense in 3Q 2018 is now reduced by a run-rate of $28.0 million from our 4Q 2016 reference point, as another $2.8 million annually was removed from the prior quarter.
• Identified further structural cost saving opportunities within logistics, information technology systems and other administrative processes which will drive greater operational efficiencies going forward.
• PCM^® platform – providing full-service, value-added fluids systems customized for the unique complexities of our clients' reservoirs – grew sequentially and now represents a majority of the domestic Energy Chemistry Technologies ("ECT") business.
• Our Global Research & Innovation Center is receiving meaningfully increased inbound client engagements related to reservoir challenges that have emerged over the past two years, namely frac hits, lower child well production, cost-effective remediation solutions and managing recycled water, all against a backdrop of driving capital efficiency improvements.
• Domestic ECT revenue held relatively flat, sequentially.
• Despite lower revenue in our CICT segment, it was able to expand adjusted EBITDA modestly compared to the second quarter.
• Demand for tailored, high-margin flavor and fragrance offerings are beginning to show a steady increase as we expected into year end and 2019.
• Completed the upgrade to our Enterprise Resource Planning ("ERP") system.

"Flotek remains focused on expanding our client base, better serving the needs of challenging and evolving industries, and solidifying new and segmented channels to market with technologically superior chemistry solutions. At the same time, we are continuing to reduce our cash and non-cash costs, and we will diligently manage our balance sheet to realize working capital benefits to drive positive operating cash flow," stated Mr. Chisholm.

3Q Financial Snapshot

• Revenue of $71.0 million for 3Q 2018 increased 20.1% compared to 2Q 2018 and decreased 10.7% compared to 3Q 2017.
• Cash SG&A of $12.4 million for 3Q 2018 (excluding stock compensation expense of $2.2 million) decreased 5.3% compared to 2Q 2018 and decreased 25.2% compared to 3Q 2017.
• Net income (loss) of ($3.9) million for 3Q 2018, compared to ($75.0) million for 2Q 2018 and net loss from continuing operations of ($3.4) million for 3Q 2017.
• GAAP earnings (loss) per share ("EPS") of ($0.07) for 3Q 2018, compared to ($1.30) for 2Q 2018 and EPS from continuing operations of ($0.06) for 3Q 2017.
• Adjusted EPS of ($0.06) for 3Q 2018, compared to ($0.34) for 2Q 2018 and adjusted EPS from continuing operations of ($0.06) for 3Q 2017.
• Adjusted EPS for 3Q 2018 excludes an after tax charge of $0.4 million, or $0.01 per share, related to a loss on sale of business and deferred tax asset valuation allowance. (See our Reconciliation of Non-GAAP Items and Non-Cash Items Impacting Earnings at the conclusion of this release.)
• Adjusted EBITDA, a non-GAAP measure, of $2.0 million for 3Q 2018, compared to ($4.0) million in 2Q 2018 and $3.3 million in 3Q 2017, a $6.0 million sequential improvement.
• Free cash flow (operating cash flow less capital expenditures) of ($6.2) million for 3Q 2018, compared to ($8.7) million for 2Q 2018 and $6.8 million for 3Q 2017. This was primarily due to working capital investments of $6.5 million as our Days Sales Outstanding ("DSOs") increased, due to the growth of our foreign revenues which carry longer payment terms compared to our domestic revenue.
• Net debt position of $51.6 million at end of 3Q 2018 increased from $46.0 million at end of 2Q 2018, principally due to an increase in DSOs. We are striving to reduce net debt by year end.

(Please refer to GAAP reconciliation tables in this release)

Third Quarter 2018 Results

For the three months ended September 30, 2018, Flotek reported revenue of $71.0 million, an increase of $11.9 million, or 20.1%, compared to the second quarter 2018. Revenue decreased of $8.5 million, or 10.7%, compared to the same period of 2017.

On a GAAP basis, Flotek reported net loss for the three months ended September 30, 2018 of $3.9 million, an increase of $0.5 million compared to net loss from continuing operations of $3.4 million in the same period of 2017. Net loss decreased $71.1 million compared to net loss of $75.0 million in the second quarter 2018. Flotek reported net loss per share (fully diluted) for the three months ended September 30, 2018 of $0.07 compared to net loss per share from continuing operations of $0.06 in the same period 2017.

Excluding select items totaling $0.4 million, net of tax, or $0.01 per share, adjusted EPS was ($0.06) for the three months ended September 30, 2018, compared to adjusted EPS from continuing operations of ($0.06) for the three months ended September 30, 2017. (See our Reconciliation of Non-GAAP Items and Non-Cash Items Impacting Earnings at the conclusion of this release.)

Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") for the three months ended September 30, 2018, was ($0.6) million, compared to $0.2 million for the three months ended September 30, 2017. Adjusted EBITDA for the three months ended September 30, 2018, which excludes select items, was $2.0 million compared to adjusted EBITDA of $3.3 million and ($4.0) million for the three months ended September 30, 2017 and June 30, 2018, respectively. Management believes that adjusted EBITDA provides useful information to investors to assess and understand operating performance and cash flows. (See our Reconciliation of Non-GAAP Items and Non-Cash Items Impacting Earnings at the conclusion of this release.)

A summary income statement reflecting third quarter results can be found at the conclusion of this release, as well as GAAP reconciliation tables.

Third Quarter 2018 – Segment Highlights

Energy Chemistry Technologies Highlights ("ECT"):

• Third quarter revenue increased 35.8% sequentially to $53.7 million, and decreased 12.2% year-over-year.
• Revenue increased sequentially due to international CnF^® sales and PCM^® activity.
• Third quarter adjusted EBITDA margins increased 4.7 percentage points sequentially to 15.3% and decreased 3.9 percentage points year-over-year.
• The sequential increase in adjusted EBITDA was driven by higher international revenue and continued increase in PCM^® activity.
• Third quarter incremental operating income margins increased 33.0% sequentially.
• Four new patents were granted during the third quarter 2018.

Consumer and Industrial Chemistry Technologies Highlights ("CICT"):

• Third quarter revenue decreased 11.6% sequentially to $17.3 million, and decreased 5.5% year-over-year.
• Revenue decreased sequentially due to lower terpene sales, partially offset by an increase in flavor and fragrance and Japan.
• Third quarter adjusted EBITDA margins increased by 1.3 percentage points sequentially to 9.2% and decreased 1.0 percentage points year-over year.
• Third quarter adjusted EBITDA margins increased sequentially despite lower revenues due to higher mix of flavor and fragrance sales, and increased internal terpene consumption.
• Current focus on expanding varietal offerings through investment in non-thermal extraction capabilities.
• During the fourth quarter, realized the largest weekly sales order bookings year-to-date, providing visibility into 2019.

Balance Sheet and Liquidity

Net Debt increased $5.6 million from $46.0 million at second quarter end to $51.6 million at third quarter end, and increased $16.0 million year-over-year from $35.6 million at third quarter end 2017. Working capital requirements were $6.5 million for the third quarter 2018, as DSOs expanded primarily due to international revenue growth. Total liquidity, including cash balances, at quarter end was $17.0 million. The balance on our credit facility as of September 30, 2018 was $53.4 million, compared to $49.1 million at second quarter end 2018. We expect a positive cash benefit from working capital in the fourth quarter.

Flotek Outlook

In commenting about Flotek's outlook, Mr. Chisholm added, "As many of our peers and clients have already reported, fourth quarter domestic completion activity will contract for the energy industry. However, based on what we have seen to date this quarter, we expect that our fourth quarter domestic ECT revenue will be up sequentially from the third quarter, while our international ECT revenue will decline due to the timing and lumpiness of large orders. As a result, we believe that our total ECT revenue will decline in the high-single digit percentage range, sequentially, in the fourth quarter.

"Within CICT, there are a number of high-margin flavor orders that we expect to occur through year end and into 2019. As such, we anticipate revenues to be up mid-to-high single digits sequentially with adjusted EBITDA margins expanding by a few percentage points in the segment.

"While we have exceeded our initial expectations on cost reductions, we continue to reduce our cash and non-cash costs across the board. We have put into place further initiatives to drive lower fixed costs and greater operational efficiencies across the organization which should begin to reflect as early as the end of this year as we continue to focus on improved cash flow."

Conference Call and Presentation Details      

Flotek will host a conference call on Wednesday, November 7, at 9:00 AM CT (10:00 AM ET) to discuss its operating results for the three and nine months ended September 30, 2018. To participate in the call, participants should dial 800-771-7943 approximately 5 minutes prior to the start of the call. In conjunction with this release, Flotek has also released a supplemental earnings presentation. Both the call and the supplemental earnings presentation can be accessed from Flotek's website at www.flotekind.com.

About Flotek Industries, Inc.

Flotek develops and delivers prescriptive chemistry-based technology, including specialty chemicals, to clients in the energy, consumer industrials and food & beverage industries. Flotek's inspired chemists draw from the power of bio-derived solvents to deliver solutions that enhance energy production, cleaning products, foods & beverages and fragrances. In the oil and gas sector, Flotek serves major and independent energy producers and oilfield service companies, both domestic and international. Flotek Industries, Inc. is a publicly traded company headquartered in Houston, Texas, and its common shares are traded on the New York Stock Exchange under the ticker symbol "FTK." For additional information, please visit Flotek's web site at www.flotekind.com.

Forward-Looking Statements

Certain statements set forth in this Press Release constitute forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) regarding Flotek Industries, Inc.'s business, financial condition, results of operations and prospects. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Press Release.

Although forward-looking statements in this Press Release reflect the good faith judgment of management, such statements can only be based on facts and factors currently known to management. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, demand for oil and natural gas drilling services in the areas and markets in which the Company operates, competition, obsolescence of products and services, the Company's ability to obtain financing to support its operations, environmental and other casualty risks, and the impact of government regulation.

Further information about the risks and uncertainties that may impact the Company are set forth in the Company's most recent filings on Form 10-K (including without limitation in the "Risk Factors" Section), and in the Company's other SEC filings and publicly available documents. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Press Release. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Press Release.

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SOURCE Flotek Industries, Inc.