Flotek Industries, Inc. Announces Second Quarter 2018 Results

HOUSTON, Aug. 7, 2018 /PRNewswire/ -- Flotek Industries, Inc. ("Flotek" or the "Company") (NYSE: FTK) today announced results for the three and six months ended June 30, 2018. 

"The second quarter was difficult and appears to mark a trough period in our Company's financial and operating performance; it was, however, also dynamic with positive implications on the future.  After a challenging start to the year, we experienced abrupt shifts in one of our key channels-to-market while simultaneously managing through the loss of our largest client due to cost pressures.  Meanwhile, the citrus market faced unprecedented disruption in the past few periods due to disease and hurricanes, further testing our resolve.  We recognize that these challenges have been disappointing for our stakeholders, but are being met and are being addressed by our leadership team, Board and employees," said John Chisholm, Flotek's Chairman, President and Chief Executive Officer.

"As the quarter progressed, we began to experience a positive inflection in our sales opportunities, protected our liquidity, and executed further SG&A reductions.  We have enhanced our Board, are finalizing the upgrade of our Enterprise Resource Planning ("ERP") system and are executing on several other initiatives that are designed to maximize our financial performance which includes key updates below:"

• Received the largest single Complex nano-Fluid^® ("CnF^®") order in our Company's history, following a multi-year, competitive and collaborative validation in support of a major unconventional gas project in the Middle East.
• Prescriptive Chemistry Management^® ("PCM^®") platform – providing full-service, value-added fluids systems customized for the unique complexities of our clients' reservoirs - continues to expand, growing 33.5% sequentially, with indications of basin and product line expansions within our existing client base, including expansion of use of our CnF^® technology.
• Further reduction in cash SG&A, now reduced by a run-rate of $25.2 mil. from the 4Q16 reference point. De-layering of management and systems and process optimization remains ongoing with further savings anticipated through year end 2018.
• Amended our credit facility with lenders to provide ample liquidity to execute business inflection through the second half of 2018 and deferred routine covenant testing until 1Q 2019.
• Domestic ECT revenue held relatively flat, sequentially.
• Continued targeted investment and expansion of our Consumer and Industrial Chemistry Technologies ("CICT") segment, where we continue to identify high margin, organic growth opportunities in 2H 2018.

"Our organizational focus is expanding our client base, strengthening our channel-to-market strategy, product offering expansions, lowering our fixed costs and improving operational efficiency so that we can execute a market share strategy and return to positive cash flow and profitability in coming periods. We have expanded our Board depth and breadth and our new leadership team is having success positioning Flotek operationally, financially and competitively during these very dynamic times and as our results inflect," stated Mr. Chisholm.

2Q Financial Snapshot

• Revenue of $59.1 million for 2Q 2018 decreased 2.4% compared to 1Q 2018 and decreased 30.6% compared to 2Q 2017.
• Cash SG&A of $13.1 million for 2Q 2018 (excluding stock compensation expense of $2.4 million) decreased 3.9% compared to 1Q 2018 and decreased 22.6% compared to 2Q 2017.
• Net income (loss) of ($75.0) million for 2Q 2018, compared to $0.1 million for 1Q 2018 and net loss from continuing operations of ($1.1) million for 2Q 2017.
• GAAP earnings (loss) per share ("EPS") of ($1.30) for 2Q 2018, compared to $0.00 for the 1Q 2018 and GAAP EPS from continuing operations of ($0.02) for the 2Q 2017.
• Adjusted EPS of ($0.34) for 2Q 2018, compared to $0.01 for 1Q 2018 and adjusted EPS from continuing operations of ($0.01) for 2Q 2017.
• Adjusted EPS for 2Q 2018 excludes pre-tax charges of $37.2 million impairment to goodwill, $2.6 million write-down of assets held for sale, $1.2 million for discontinuation of corporate projects, and $0.4 million related to the closing of a business venture, and $22.8 million deferred tax asset valuation allowance, totaling $55.5 million, or $0.96 per share, net of tax. (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 ($4.0) million for 2Q 2018, compared to ($1.0) million in 1Q 2018 and $6.0 million in 2Q 2017.
• Free cash flow (operating cash flow less capital expenditures) of ($8.7) million for 2Q 2018, compared to ($13.5) million for 1Q 2018 and ($7.3) million for 2Q 2017 partially due to working capital investments of ($1.7) million as we fulfill a large CnF^® order.
• Net debt position of $46.0 million at 2Q end 2018 increased from $36.9 million at 1Q end 2018, principally due to inventory build, EBITDA losses and funding of Capex.

(Please refer to GAAP reconciliation tables in this release)

Second Quarter 2018 Results
For the three months ended June 30, 2018, Flotek reported revenue of $59.1 million, a decrease of $26.1 million, or 30.6%, compared to $85.2 million in the same period of 2017. Revenue decreased $1.4 million, or 2.4%, compared to first quarter 2018.

On a GAAP basis, Flotek reported net income (loss) for the three months ended June 30, 2018 of ($75.0) million, a decrease of $73.9 million compared to income (loss) from continuing operations of ($1.1) million in the same period of 2017. Income (loss) decreased $75.1 million compared to $0.1 million in the first quarter 2018. Flotek reported income (loss) per share (fully diluted) for the three months ended June 30, 2018 of ($1.30) compared to income (loss) per share from continuing operations of ($0.02) in the same period 2017.

Excluding select items, which can be found in the Reconciliation to Adjusted Net Income (Loss) table at the conclusion of this release, totaling $55.5 million, net of tax, or $0.96 per share, adjusted EPS was ($0.34) for the three months ended June 30, 2018, compared to adjusted EPS from continuing operations of ($0.01) for the three months ended June 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 June 30, 2018, was ($47.8) million, compared to $2.0 million for the three months ended June 30, 2017. Adjusted EBITDA for the three months ended June 30, 2018, which excludes select items found in the Reconciliation to Adjusted EBITDA at the conclusion of this release, was ($4.0) million compared to adjusted EBITDA for the three months ended June 30, 2017 of $6.0 million and adjusted EBITDA for the three months ended March 31, 2018 of ($1.0) million. 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 second quarter results can be found at the conclusion of this release, as well as GAAP reconciliation tables.

Second Quarter 2018 – Segment Highlights

Energy Chemistry Technologies Highlights ("ECT"):

• Second quarter revenue decreased 3.7% sequentially to $39.5 million, and decreased 40.0% year-over-year.
• Received the single largest CnF^® order in Company history, which provides for visibility of growth through the second half of 2018.
• Second quarter adjusted EBITDA margins decreased 3.1 percentage points sequentially to 10.6% and decreased 13.4 percentage points year-over-year. The declines in both comparable periods were driven primarily by startup costs associated with growth in PCM^® opportunities and lower fixed cost absorption in plant operations.
• Seven new patents were granted during the second quarter 2018.

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

• Second quarter revenue increased 0.5% sequentially to $19.5 million, and increased 1.2% year-over-year.
• Second quarter adjusted EBITDA margins decreased by 9.3 percentage points sequentially to 7.9% due to lower mix of Flavor and Fragrance products and higher mix of terpenes. Second quarter adjusted EBITDA margins decreased 3.1 percentage points year-over-year.
• Expansion of our plant through recently completed distillation tower which is now fully operational.
• Japan expansion is beginning to show signs of higher margin sales opportunities to become more consistent in future periods.
• Showcased CICT's 100% natural citrus ingredients at the largest domestic brewing conference and trade show, increasing the Company's exposure to the beverage markets.

Balance Sheet and Liquidity
Net Debt increased $9.2 million from $36.9 million at first quarter end to $46.0 million at second quarter end, and increased $6.7 million year-over-year from $39.3 million at second quarter end 2017. Working capital requirements were $1.7 million for the second quarter 2018, primarily driven by inventory builds. Total liquidity at quarter end was $20.1 million. The balance on our credit facility as of June 30, 2018 was $49.1 million, compared to $39.7 million at first quarter end 2018.  We expect working capital benefits in the second half of 2018 as seasonal citrus oil purchasing unwinds and as purchase orders related to a large unconventional gas project in the Middle East are recognized as revenue.

Flotek Outlook
In commenting about Flotek's outlook, Chisholm added, "Our PCM^® platform continues to experience strong demand from operators, and we believe our second quarter found a bottoming baseline of activity from which we expect to grow moving forward. In addition, we are excited to efficiently fulfill orders in support of a large Middle East unconventional gas project where our CnF^® technology is being utilized. Taken together, we believe our ECT revenue could increase at least 18%-23% sequentially. This is in fact supported by our July revenue in the segment. In our CICT segment, we expect revenues could increase in the mid-single digits sequentially.

We do not expect any material increases to our SG&A levels looking ahead, but rather are working to realize the potential for further savings. However, we do remain mindful and vigilant of the inherent risks surrounding Permian takeaway capacity, the mobilization of frac equipment and the unpredictability in the timing of future international projects."

Conference Call Details
Flotek will host a conference call on Wednesday, August 8, at 9:00 AM CT (10:00 AM ET) to discuss its operating results for the three and six months ended June 30, 2018. To participate in the call, participants should dial 800-671-8739 approximately 5 minutes prior to the start of the call. The call can also 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.