|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance, beginning of year
|
$
|
709
|
|
|
$
|
510
|
|
|
$
|
548
|
|
Charged to provision for doubtful accounts
|
558
|
|
|
367
|
|
|
50
|
|
Write-offs
|
(603
|
)
|
|
(168
|
)
|
|
(88
|
)
|
Balance, end of year
|
$
|
664
|
|
|
$
|
709
|
|
|
$
|
510
|
|
Inventories
Inventories consist of raw materials, work-in-process, and finished goods and are stated at the lower of cost, determined using the weighted-average cost method, or market. Finished goods inventories include raw materials, direct labor, and production overhead. The Company regularly reviews inventories on hand and current market conditions to determine if the cost of finished goods inventories exceeds current market prices and impairs the cost basis of the inventory accordingly. Historically, the Company recorded a provision for excess and obsolete inventory. Impairment or provisions are based primarily on forecasts of product demand, historical trends, market conditions, production, or procurement requirements and technological developments and advancements.
At
December 31, 2016
and
2015
, the Company recorded an impairment for all inventory items identified as excess and obsolete inventory.
Property and Equipment
Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including assets held under capital leases, is calculated using the straight-line method over the asset’s estimated useful life as follows:
|
|
|
Buildings and leasehold improvements
|
2-30 years
|
Machinery, equipment, and rental tools
|
7-10 years
|
Furniture and fixtures
|
3 years
|
Transportation equipment
|
2-5 years
|
Computer equipment and software
|
3-7 years
|
Property and equipment are reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of an asset or asset group may not be recoverable. Indicative events or circumstances include, but are not limited to, matters such as a significant decline in
market value or a significant change in business climate. An impairment loss is recognized when the carrying value of an asset exceeds the estimated undiscounted future cash flows from the use of the asset and its eventual disposition. The amount of impairment loss recognized is the excess of the asset’s carrying value over its fair value. Assets to be disposed of are reported at the lower of the carrying value or the fair value less cost to sell. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying value of the asset and the net proceeds received.
Internal Use Computer Software Costs
Direct costs incurred to purchase and develop computer software for internal use are capitalized during the application development and implementation stages. These software costs have been for enterprise-level business and finance software that is customized to meet the Company’s specific operational needs. Capitalized costs are included in property and equipment and are amortized on a straight-line basis over the estimated useful life of the software beginning when the software project is substantially complete and placed in service. Costs incurred during the preliminary project stage and costs for training, data conversion, and maintenance are expensed as incurred.
The Company amortizes software costs using the straight-line method over the expected life of the software, generally
3
to
7
years. The unamortized amount of capitalized software was
$5.7 million
at
December 31, 2016
.
Goodwill
Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination. Goodwill is not subject to amortization, but is tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include an adverse change in the business climate or a change in the assessment of future operations of a reporting unit.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative assessment or two-step impairment test is performed to determine whether goodwill impairment exists at the reporting unit.
The first step is to compare the estimated fair value of each reporting unit with goodwill to its carrying amount, including goodwill. To determine fair value estimates, the Company uses the income approach based on discounted cash flow analyses, combined, when appropriate, with a market-based approach. The market-based approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly traded businesses operating in industries consistent with the reporting unit. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is performed to determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess.
Other Intangible Assets
The Company’s other intangible assets have finite and indefinite lives and consist of customer relationships, trademarks, brand names, and purchased patents.
The cost of intangible assets with finite lives is amortized using the straight-line method over the estimated period of economic benefit, ranging from
2
to
20 years
. Asset lives are adjusted whenever there is a change in the estimated period of economic benefit. No residual value has been assigned to these intangible assets.
Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. These conditions may include a change in the extent or manner in which the asset is being used or a change in future operations. The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins, and cash flows. If the sum of expected future cash flows (undiscounted and without
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 acquisitions method. The Company allocates the fair value of purchase consideration to the assets acquired, liabilities assumed, and any non-controlling interests in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed, and any non-controlling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and Flotek and the value of the acquired assembled workforce. Acquisition-related expenses are recognized separately from the business acquisition and are recognized as expenses as incurred.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions market participants would use to value an asset or liability and may be observable or unobservable. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable 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. Based on historical return
rates, no provision is made for returns at the time of sale. All costs associated with product returns are expensed as incurred.
Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Income Taxes
The Company had
two
U.S. tax filing groups which filed separate U.S. Federal tax returns. Taxable income of one return could not be offset by tax attributes, including net operating losses, of the other return. During the year ended December 31, 2015, the Company restructured its legal entities such that there is only
one
U.S. tax filing group filing a single U.S. consolidated federal income tax return beginning in 2016.
The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets and liabilities are recognized related to the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company’s assets and liabilities using statutory tax rates at the applicable year end. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously recorded tax assets when it becomes more likely than not that such assets will not be realized. The Company evaluates, at
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
least annually, net operating loss carry forwards and other net deferred tax assets and considers all available evidence, both positive and negative, to determine whether a valuation allowance is necessary relative to net operating loss carry forwards and other net deferred tax assets. In making this determination, the Company considers cumulative losses in recent years as significant negative evidence. The Company considers recent years to mean the current year plus the two preceding years. The Company considers the recent cumulative income or loss position of its filings groups as objectively verifiable evidence for the projection of future income, which consists primarily of determining the average of the pre-tax income of the current and prior two years after adjusting for certain items not indicative of future performance. Based on this analysis, the Company determines whether a valuation allowance is necessary.
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. 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.
Capitalization of Interest
Interest costs are capitalized for qualifying in-process software development projects. Capitalization of interest commences when activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Interest costs are capitalized until the assets are ready for their intended use. Capitalized interest is added to the cost of the underlying assets and amortized over the estimated useful lives of the assets.
Stock-Based Compensation
Stock-based compensation expense for share-based payments, related to stock option and restricted stock awards, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates.
Significant items subject to estimates and assumptions include application of the percentage-of-completion method of revenue recognition, the carrying amount and useful lives of property and equipment and intangible assets, impairment assessments, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the disposal group; (2) the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; (3) an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale, within one year, except if events of circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; (5) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A disposal group that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met.
Subsequent changes in the fair value of a disposal group less any costs to sell are reported as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group for all periods presented in the line items assets held for sale and liabilities held for sale, respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that can be clearly distinguished, operationally and for financial reporting purposes, that either has been disposed of or is classified as held for sale is reported in discontinued operations, if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.
General corporate overhead is not allocated to discontinued operations for all periods presented. Interest expense on debt required to be repaid as a result of disposal transactions is allocated to discontinued operations. Interest allocated to discontinued operations totaled
$0.4 million
,
$0.2 million
, and
$0.2 million
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not impact net income.
New Accounting Pronouncements
(a) Application of New Accounting Standards
Effective January 1, 2016, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. 2015-01, “
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.
” This ASU eliminates from U.S. GAAP the concept of extraordinary items and the need for an entity to separately classify, present, and disclose extraordinary events and transactions, while retaining certain presentation and disclosure guidance for items that are unusual in nature or occur infrequently. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
Effective January 1, 2016, the Company adopted the accounting guidance in ASU No. 2015-02, “
Amendments to
the Consolidation Analysis
.” The amendment eliminates the deferral of certain consolidation standards for entities considered to be investment companies and modifies the consolidation analysis performed on certain types of legal entities. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
Effective January 1, 2016, the Company adopted the accounting guidance in ASU No. 2015-03, “
Simplifying the Presentation of Debt Issuance Costs
.” The accounting guidance requires that debt issuance costs related to a recognized debt liability be reported on the Consolidated Statements of Financial Condition as a direct deduction from the carrying amount of that debt liability. In addition, the Company adopted the accounting guidance in ASU No. 2015-15, which provides additional guidance related to the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. An entity may present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings. Implementation of these standards did not have a material effect on the consolidated financial statements and related disclosures.
Effective January 1, 2016, the Company adopted the accounting guidance in ASU No. 2015-16, “
Simplifying the Accounting for Measurement-Period Adjustments
.” This standard replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the guidance. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
(b) New Accounting Requirements and Disclosures
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “
Revenue from Contracts with Customers
.” The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with customers. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, but not before the original effective date of reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, which improves the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, which clarifies identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-11, which rescinds certain SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, effective upon adoption of ASU 2014-09, and ASU No. 2016-12, which reduces the potential for diversity in practice at initial application and reduces the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. In December 2016, the FASB issued ASU No. 2016-20, which provides technical corrections and improvements to the original guidance issued. The Company intends to adopt the new standard in the first quarter of 2018 using the modified retrospective method. The Company has identified key contract types representative of its business for comparing historical accounting policies and practices to the new standard and is continuing to evaluate the impact these pronouncements will have on the consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11, “
Simplifying the Measurement of Inventory
.” This standard requires management to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and should be applied retrospectively, with early application permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU 2015-17, “
Balance Sheet Classification of Deferred Taxes
.” This standard eliminates the current requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
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 leases under previous U.S. GAAP. The pronouncement is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and should be applied using a modified retrospective transition approach, with early application permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, “
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 pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, “
Measurement of Credit Losses on Financial Instruments
.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
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 on the consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16, “
Intra-Entity Transfers of Assets Other Than Inventory.
” This standard requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
when the transfer occurs, instead of when the asset is sold to an outside party. The pronouncement is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual
reporting periods, with early adoption 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 is executing a plan to sell or otherwise dispose of the Drilling Technologies and Production Technologies segments. An investment banking advisory services firm has been engaged and is actively marketing these segments.
The Company met all of the criteria to classify the Drilling Technologies and Production Technologies segments’ assets and liabilities as held for sale in the fourth quarter 2016. Effective December 31, 2016, the Company has classified the assets, liabilities, and results of operations for these
two
segments as “Discontinued Operations” for all periods presented.
Disposal of the Drilling Technologies and Production Technologies reporting segments represents a strategic shift that will have a major effect on the Company’s operations and financial results. These segments are available for immediate sale in their present condition, subject only to usual and customary terms, and management expects sales to be completed by the end of 2017.
On December 30, 2016, the Company sold a portion of its Drilling Technologies segment and recorded a loss of
$1,199,000
which is included in the loss from discontinued operations for the year ended December 31, 2016.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the years ended December 31, 2016, 2015, and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Technologies
|
|
Production Technologies
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
27,627
|
|
|
$
|
52,112
|
|
|
$
|
113,302
|
|
|
$
|
8,292
|
|
|
$
|
12,281
|
|
|
$
|
16,003
|
|
Cost of revenue
|
(18,667
|
)
|
|
(35,410
|
)
|
|
(67,651
|
)
|
|
(7,881
|
)
|
|
(10,179
|
)
|
|
(9,459
|
)
|
Selling, general and administrative
|
(15,285
|
)
|
|
(21,049
|
)
|
|
(22,870
|
)
|
|
(3,790
|
)
|
|
(4,158
|
)
|
|
(3,040
|
)
|
Depreciation and amortization
|
(1,714
|
)
|
|
(3,240
|
)
|
|
(3,343
|
)
|
|
(584
|
)
|
|
(658
|
)
|
|
(254
|
)
|
Research and development
|
(64
|
)
|
|
(202
|
)
|
|
(172
|
)
|
|
(888
|
)
|
|
(596
|
)
|
|
(17
|
)
|
Gain (loss) on disposal of long-lived assets
|
103
|
|
|
17
|
|
|
(244
|
)
|
|
(50
|
)
|
|
3
|
|
|
14
|
|
Impairment of inventory and long-lived assets
|
(36,522
|
)
|
|
(19,568
|
)
|
|
—
|
|
|
(3,913
|
)
|
|
(804
|
)
|
|
—
|
|
(Loss) income from operations
|
(44,522
|
)
|
|
(27,340
|
)
|
|
19,022
|
|
|
(8,814
|
)
|
|
(4,111
|
)
|
|
3,247
|
|
Other expense
|
(412
|
)
|
|
(259
|
)
|
|
(227
|
)
|
|
(96
|
)
|
|
(40
|
)
|
|
(28
|
)
|
Loss on sale of assets
|
(1,199
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss on write-down of assets held for sale
|
(18,971
|
)
|
|
—
|
|
|
—
|
|
|
(6,161
|
)
|
|
—
|
|
|
—
|
|
(Loss) income before income taxes
|
(65,104
|
)
|
|
(27,599
|
)
|
|
18,795
|
|
|
(15,071
|
)
|
|
(4,151
|
)
|
|
3,219
|
|
Income tax benefit (expense)
|
23,661
|
|
|
9,675
|
|
|
(6,858
|
)
|
|
5,477
|
|
|
1,455
|
|
|
(1,175
|
)
|
Net (loss) income from discontinued operations
|
$
|
(41,443
|
)
|
|
$
|
(17,924
|
)
|
|
$
|
11,937
|
|
|
$
|
(9,594
|
)
|
|
$
|
(2,696
|
)
|
|
$
|
2,044
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assets and liabilities held for sale on the Consolidated Balance Sheets as of December 31, 2016 and 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Technologies
|
|
Production Technologies
|
|
December 31, 2016
|
|
December 31, 2015
|
|
December 31, 2016
|
|
December 31, 2015
|
Assets:
|
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
5,072
|
|
|
$
|
7,712
|
|
|
$
|
1,784
|
|
|
$
|
5,974
|
|
Inventories
|
9,078
|
|
|
22,388
|
|
|
8,115
|
|
|
12,234
|
|
Other current assets
|
278
|
|
|
315
|
|
|
370
|
|
|
232
|
|
Long-term receivable
|
—
|
|
|
—
|
|
|
4,179
|
|
|
—
|
|
Property and equipment, net
|
11,277
|
|
|
27,837
|
|
|
3,978
|
|
|
4,070
|
|
Goodwill
|
15,333
|
|
|
15,333
|
|
|
1,689
|
|
|
1,689
|
|
Other intangible assets, net
|
7,395
|
|
|
17,648
|
|
|
484
|
|
|
540
|
|
Assets held for sale
|
48,433
|
|
|
91,233
|
|
|
20,599
|
|
|
24,739
|
|
Valuation allowance
|
(18,971
|
)
|
|
—
|
|
|
(6,161
|
)
|
|
—
|
|
Assets held for sale, net
|
$
|
29,462
|
|
|
$
|
91,233
|
|
|
$
|
14,438
|
|
|
$
|
24,739
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
2,472
|
|
|
$
|
1,441
|
|
|
$
|
914
|
|
|
$
|
782
|
|
Accrued liabilities
|
1,190
|
|
|
1,897
|
|
|
385
|
|
|
517
|
|
Liabilities held for sale
|
$
|
3,662
|
|
|
$
|
3,338
|
|
|
$
|
1,299
|
|
|
$
|
1,299
|
|
Note 4 — Impairment of Inventory and Long-Lived
Assets for Discontinued Operations
During the three months ended
March 31, 2016
, as a result of changes in the oil and gas industry that occurred since the beginning of 2016 and the corresponding impact on the Company’s business outlook, the Company evaluated the direction of its business activities. Crude oil prices, which appeared to have stabilized during the fourth quarter of 2015, fell further during the first quarter of 2016, decreasing approximately
21%
from average prices seen in the fourth quarter of 2015. The U.S. drilling rig count declined from
698
at December 31, 2015 to
450
at April 1, 2016, a decline of
35.5%
.
Due to the decreased rig activity and its impact on management’s expectations for future market activity, the Company further refocused operations of its Drilling Technologies segment. The Company decided to exit the business of building and repairing motors in all domestic markets. In addition, changes in drilling technique, including further escalation of the move to a dominance of pad drilling, reduced the marketability of certain other inventory items. The focus of the Production Technologies segment is being shifted to its new technologies for electric submersible pumps for the oil and gas industry and for hydraulic pumping units. Inventory associated with older technologies for these items has been evaluated for impairment. As a result of these changes in focus and projected declines in asset utilization, the Company recorded a pre-tax impairment of inventories as noted below.
Changes in the business climate noted above and increasing operating losses experienced within the Drilling Technologies and Production Technologies segments during the three months ended
March 31, 2016
, caused the Company to test asset groups within these
two
segments for recoverability. Recoverability of the carrying value of the asset groups was based upon estimated future cash flows while taking into consideration various assumptions and estimates, including future use of the assets, remaining useful life of the assets, and eventual disposition of the assets. Undiscounted estimated cash flows of two asset groups associated with domestic operations in the Drilling Technologies segment did not exceed the carrying value of the respective asset groups. Therefore, the Company performed an analysis of discounted future cash flows to determine the fair value of each of these two asset groups. As a result of this testing, the Company recorded a pre-tax impairment of long-lived assets as noted below.
In addition, during the three months ended
June 30, 2015
, as a result of decreased rig activity and its impact on management’s expectations for future market activity, the Company refocused the Drilling Technologies segment to businesses and markets that have the best opportunity for profitable growth in the future. In addition, the Company shifted the focus of the Production Technologies segment to
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
oil production markets and away from coal bed methane markets. As a result of these changes in focus and projected
declines in asset utilization, the Company recorded pre-tax impairment charges as noted below.
The Company recorded impairment charges during the three months ended
March 31, 2016
and
June 30, 2015
, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 31, 2016
|
|
June 30, 2015
|
Drilling Technologies:
|
|
|
|
Inventories
|
$
|
12,653
|
|
|
$
|
17,241
|
|
Long-lived assets:
|
|
|
|
Property and equipment
|
14,642
|
|
|
2,327
|
|
Intangible assets other than goodwill
|
9,227
|
|
|
—
|
|
Production Technologies:
|
|
|
|
Inventories
|
3,913
|
|
|
804
|
|
Total impairment
|
$
|
40,435
|
|
|
$
|
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 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.
On April 1, 2014, the Company acquired
100%
of the membership interests in SiteLark, LLC (“SiteLark”) for
$0.4 million
in cash consideration and
5,327
shares of the Company’s common stock. SiteLark provides reservoir engineering and modeling services for a variety of hydrocarbon applications. Its services include proprietary software that assists engineers with reservoir simulation, reservoir engineering and waterflood optimization.
On January 1, 2014, the Company acquired
100%
of the membership interests in Eclipse IOR Services, LLC (“EOGA”), a leading Enhanced Oil Recovery (“EOR”) design and injection firm, for
$5.3 million
in cash consideration, net of cash received, and
94,354
shares of the Company’s common stock. EOGA’s enhanced oil recovery processes and its use of polymers to improve the performance of EOR projects has been combined with the Company’s existing EOR products and services.
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
|
|
2014
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
Value of common stock issued in acquisitions
|
$
|
3,268
|
|
|
$
|
1,014
|
|
|
$
|
2,043
|
|
Final Florida Chemical acquisition adjustment
|
—
|
|
|
—
|
|
|
1,162
|
|
Value of common stock issued in payment of accrued liability
|
—
|
|
|
—
|
|
|
600
|
|
Exercise of stock options by common stock surrender
|
50
|
|
|
1,332
|
|
|
1,198
|
|
|
|
|
|
|
|
Supplemental cash payment information:
|
|
|
|
|
|
Interest paid
|
$
|
2,024
|
|
|
$
|
1,398
|
|
|
$
|
1,285
|
|
Income taxes paid, net of refunds
|
333
|
|
|
1,547
|
|
|
22,389
|
|
Note 7 — Revenue
The Company differentiates revenue and cost of revenue based on whether the source of revenue is attributable to products or services. Revenue and cost of revenue by source are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenue:
|
|
|
|
|
|
Products
|
$
|
256,263
|
|
|
$
|
258,968
|
|
|
$
|
304,973
|
|
Services
|
6,569
|
|
|
10,998
|
|
|
14,879
|
|
|
$
|
262,832
|
|
|
$
|
269,966
|
|
|
$
|
319,852
|
|
Cost of Revenue:
|
|
|
|
|
|
Products
|
$
|
162,487
|
|
|
$
|
164,837
|
|
|
$
|
179,258
|
|
Services
|
7,768
|
|
|
7,196
|
|
|
8,257
|
|
Depreciation
|
1,899
|
|
|
1,627
|
|
|
1,573
|
|
|
$
|
172,154
|
|
|
$
|
173,660
|
|
|
$
|
189,088
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Inventories
Inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Raw materials
|
$
|
28,626
|
|
|
$
|
30,127
|
|
Work-in-process
|
2,918
|
|
|
3,044
|
|
Finished goods
|
26,739
|
|
|
17,699
|
|
Inventories
|
$
|
58,283
|
|
|
$
|
50,870
|
|
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance, beginning of year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
98
|
|
Charged to costs and expenses
|
—
|
|
|
—
|
|
|
10
|
|
Deductions
|
—
|
|
|
—
|
|
|
(108
|
)
|
Balance, end of the year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
At
December 31, 2016
and
2015
, the Company recorded an impairment for all inventory items identified as excess and obsolete inventory.
Note 9 — Property and Equipment
Property and equipment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2016
|
|
2015
|
Land
|
$
|
5,837
|
|
|
$
|
4,988
|
|
Buildings and leasehold improvements
|
42,986
|
|
|
23,038
|
|
Machinery, equipment and rental tools
|
36,187
|
|
|
29,427
|
|
Equipment in progress
|
3,235
|
|
|
11,916
|
|
Furniture and fixtures
|
1,969
|
|
|
1,838
|
|
Transportation equipment
|
3,059
|
|
|
1,714
|
|
Computer equipment and software
|
11,844
|
|
|
10,723
|
|
Property and equipment
|
105,117
|
|
|
83,644
|
|
Less accumulated depreciation
|
(30,426
|
)
|
|
(23,638
|
)
|
Property and equipment, net
|
$
|
74,691
|
|
|
$
|
60,006
|
|
Depreciation expense, including expense recorded in cost of revenue, totaled
$7.6 million
,
$5.8 million
, and
$4.7 million
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
During the years ended
December 31, 2016
,
2015
, and
2014
,
no
impairments were recognized related to property and equipment.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Goodwill
The Company has
two
reporting units, Energy Chemistry Technologies and Consumer and Industrial Chemistry Technologies, which have existing goodwill balances at
December 31, 2016
.
Goodwill is tested for impairment annually in the fourth quarter, or more frequently if circumstances indicate a potential impairment. During annual goodwill impairment testing during the years ended
December 31, 2016
and
2014
, the Company first assessed qualitative factors to determine whether it was necessary to perform the two-step goodwill impairment test that the Company has historically used. The Company concluded that it was not more likely than not that goodwill was impaired as of the fourth quarter of
2016
and
2014
, and therefore, further testing was not required.
During annual goodwill impairment testing during the year ended
December 31, 2015
, the Company assessed the qualitative factors and concluded it was not more likely than not that there was an impairment of goodwill for the Consumer and Industrial Chemistry Technologies reporting unit. However, the Company was not able to conclude that it was not more likely than not that fair value of the Energy Chemistry Technologies reporting unit exceeded its carrying value. Therefore, the Company performed the Step 1 impairment test for this reporting unit. The result of the Step 1 test indicated that the fair value of the Energy Chemistry Technologies reporting unit exceeded its carrying amount. Therefore, no further testing was required for this reporting unit.
No
impairments of goodwill were recognized during the years ended
December 31, 2016
,
2015
, and
2014
.
Changes in the carrying value of goodwill for each reporting unit are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Chemistry Technologies
|
|
Consumer and Industrial Chemistry Technologies
|
|
Total
|
Balance at December 31, 2014:
|
|
|
|
|
|
Goodwill
|
$
|
36,318
|
|
|
$
|
19,480
|
|
|
$
|
55,798
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill balance, net
|
36,318
|
|
|
19,480
|
|
|
55,798
|
|
Activity during the year 2015:
|
|
|
|
|
|
Goodwill impairment recognized
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition goodwill recognized
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2015:
|
|
|
|
|
|
Goodwill
|
36,318
|
|
|
19,480
|
|
|
55,798
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill balance, net
|
36,318
|
|
|
19,480
|
|
|
55,798
|
|
Activity during the year 2016:
|
|
|
|
|
|
Goodwill impairment recognized
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition goodwill recognized
|
862
|
|
|
—
|
|
|
862
|
|
Balance at December 31, 2016:
|
|
|
|
|
|
Goodwill
|
37,180
|
|
|
19,480
|
|
|
56,660
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill balance, net
|
$
|
37,180
|
|
|
$
|
19,480
|
|
|
$
|
56,660
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Other Intangible Assets
Other intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
Cost
|
|
Accumulated
Amortization
|
|
Cost
|
|
Accumulated
Amortization
|
Finite lived intangible assets:
|
|
|
|
|
|
|
|
Patents and technology
|
$
|
16,815
|
|
|
$
|
4,537
|
|
|
$
|
16,544
|
|
|
$
|
3,461
|
|
Customer lists
|
30,877
|
|
|
6,518
|
|
|
30,467
|
|
|
4,904
|
|
Trademarks and brand names
|
1,467
|
|
|
1,069
|
|
|
1,040
|
|
|
925
|
|
Total finite lived intangible assets acquired
|
49,159
|
|
|
12,124
|
|
|
48,051
|
|
|
9,290
|
|
Deferred financing costs
|
1,804
|
|
|
117
|
|
|
1,665
|
|
|
858
|
|
Total amortizable intangible assets
|
50,963
|
|
|
$
|
12,241
|
|
|
49,716
|
|
|
$
|
10,148
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
Trademarks and brand names
|
11,630
|
|
|
|
|
11,630
|
|
|
|
Total other intangible assets
|
$
|
62,593
|
|
|
|
|
$
|
61,346
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value:
|
|
|
|
|
|
|
|
Other intangible assets, net
|
$
|
50,352
|
|
|
|
|
$
|
51,198
|
|
|
|
Intangible assets acquired are amortized on a straight-line basis over
two
to
20
years. Amortization of intangible assets acquired totaled
$2.8 million
,
$3.0 million
, and
$3.0 million
for the years end ended
December 31, 2016
,
2015
, and
2014
, respectively.
Amortization of deferred financing costs totaled
$0.4 million
,
$0.3 million
, and
$0.3 million
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
Estimated future amortization expense for other intangible assets, including deferred financing costs, at
December 31, 2016
is as follows (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
|
|
2017
|
|
$
|
3,070
|
|
2018
|
|
2,990
|
|
2019
|
|
2,930
|
|
2020
|
|
2,638
|
|
2021
|
|
2,428
|
|
Thereafter
|
|
24,666
|
|
Other intangible assets, net
|
|
$
|
38,722
|
|
During the years ended
December 31, 2016
,
2015
, and
2014
,
no
impairments were recognized related to other intangible assets.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — Long-Term Debt and Credit Facility
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Long-term debt:
|
|
|
|
Borrowings under revolving credit facility
|
$
|
38,566
|
|
|
$
|
25,148
|
|
Term loan
|
9,833
|
|
|
25,398
|
|
Total long-term debt
|
48,399
|
|
|
50,546
|
|
Less current portion of long-term debt
|
(40,566
|
)
|
|
(32,291
|
)
|
Long-term debt, less current portion
|
$
|
7,833
|
|
|
$
|
18,255
|
|
Credit Facility
On May 10, 2013, the Company and certain of its subsidiaries (the “Borrowers”) entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC Bank”). The Company may borrow under the Credit Facility for working capital, permitted acquisitions, capital expenditures and other corporate purposes. Under terms of the Credit Facility, as amended, the Company has total borrowing availability of
$65 million
under a revolving credit facility and a term loan.
The Credit Facility is secured by substantially all of the Company’s domestic real and personal property, including accounts receivable, inventory, land, buildings, equipment and other intangible assets. The Credit Facility contains customary representations, warranties, and both affirmative and negative covenants. The Credit Facility restricts the payment of cash dividends on common stock and limits the amount that may be used to repurchase common stock and preferred stock. In the event of default, PNC Bank may accelerate the maturity date of any outstanding amounts borrowed under the Credit Facility.
Effective
September 30, 2016
, the Company entered into a Sixth Amendment to the Credit Facility which extended its term by
two years
through May 10, 2020, and set total borrowing capacity at
$65 million
. Initially, the Company (a) may borrow up to
$55 million
under a revolving credit facility and (b) has borrowed
$10 million
under a term loan. The revolving credit facility limit will increase by each term loan principal payment, therefore, total borrowing capacity will remain at
$65 million
throughout the term of the Credit Facility.
The Sixth Amendment to the Credit Facility contains financial covenants to maintain a fixed charge coverage ratio and a leverage ratio, as well as establishes an annual limit on capital expenditures. The fixed charge coverage ratio is the ratio of (a) adjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”) less cash taxes paid during the period to (b) all debt payments during such period. The fixed
charge coverage ratio requirement begins for the quarter ending March 31, 2017 at
1.00
to 1.00 and increases to
1.10
to 1.00 for the year ending December 31, 2017, and thereafter. The leverage ratio (funded debt to adjusted EBITDA) requirement begins for the six months ending June 30, 2017 at not greater than
5.5
to 1.0 and reduces to not greater than
4.0
to 1.0 for the year ending March 31, 2018, and thereafter. The annual limit on capital expenditures is
$20 million
. The annual limit on capital expenditures is affected if the undrawn availability of the revolving credit facility falls below
$15 million
at any month-end.
The Credit Facility includes a provision, effective beginning in 2017, that
25%
of EBITDA minus cash paid for taxes, dividends, debt payments, and unfunded capital expenditures, not to exceed
$3.0 million
for any year, be paid on the outstanding balance of the term loan within
60 days
of the fiscal year end.
Each of the Company’s domestic and foreign subsidiaries is fully obligated for Credit Facility indebtedness as a Borrower or as a guarantor.
(a) Revolving Credit Facility
Under the revolving credit facility, the Company may initially borrow up to
$55 million
through
May 10, 2020
. This includes a sublimit of
$10 million
that may be used for letters of credit. The revolving credit facility limit will increase by each term principal payment. The revolving credit facility is secured by substantially all of the Company’s domestic and Canadian accounts receivable and inventory.
At
December 31, 2016
, eligible accounts receivable and inventory securing the revolving credit facility provided total borrowing capacity of
$55.1 million
under the revolving credit facility. Available borrowing capacity, net of outstanding borrowings, was
$16.5 million
at
December 31, 2016
.
The interest rate on advances under the revolving credit facility varies based on the fixed charge coverage ratio. Rates range
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) between PNC Bank’s base lending rate plus
1.5%
to
2.0%
or (b) between the London Interbank Offered Rate (LIBOR) plus
2.5%
to
3.0%
. PNC Bank’s base lending rate was
3.75%
at
December 31, 2016
. The Company is required to pay a monthly facility fee of
0.25%
per annum, on any unused amount under the commitment based on daily averages. At
December 31, 2016
,
$38.6 million
was outstanding under the revolving credit facility, with
$5.6 million
borrowed as base rate loans at an interest rate of
5.75%
and
$33.0 million
borrowed as LIBOR loans at an interest rate of
3.62%
.
Borrowing under the revolving credit facility is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause.
(b) Term Loan
The amount borrowed under the term loan was reset to
$10 million
effective as of
September 30, 2016
. Monthly principal
payments of
$0.2 million
are required. The unpaid balance of the term loan is due
May 10, 2020
. Prepayments are permitted, and may be required in certain circumstances. Amounts repaid under the term loan will be added to the borrowing availability under the revolving credit facility. The term loan is secured by substantially all of the Company’s domestic land, buildings, equipment, and other intangible assets.
The interest rate on the term loan varies based on the fixed charge coverage ratio. Rates range (a) between PNC Bank’s base lending rate plus
2.25%
to
2.75%
or (b) between LIBOR plus
3.25%
to
3.75%
. At
December 31, 2016
,
$9.8 million
was outstanding under the term loan, with
$0.8 million
borrowed as base rate loans at an interest rate of
6.50%
and
$9.0 million
borrowed as LIBOR loans at an interest rate of
4.37%
.
Debt Maturities
Maturities of long-term debt at
December 31, 2016
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
Revolving Credit Facility
|
|
Term Loan
|
|
Total
|
2017
|
|
$
|
38,566
|
|
|
$
|
2,000
|
|
|
$
|
40,566
|
|
2018
|
|
—
|
|
|
2,000
|
|
|
2,000
|
|
2019
|
|
—
|
|
|
2,000
|
|
|
2,000
|
|
2020
|
|
—
|
|
|
3,833
|
|
|
3,833
|
|
Total
|
|
$
|
38,566
|
|
|
$
|
9,833
|
|
|
$
|
48,399
|
|
Note 13 — Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
|
•
|
Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.
|
Liabilities Measured at Fair Value on a Recurring Basis
At
December 31, 2016
and
2015
, no liabilities were required to be measured at fair value on a recurring basis.
There were no transfers in or out of either Level 1, Level 2, or Level 3 fair value measurements during the years ended
December 31, 2016
,
2015
, and
2014
.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment, goodwill, and other intangible assets are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances.
No
impairment of any of these assets was recognized during the years ended
December 31, 2016
,
2015
, and
2014
.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, approximate fair value due to the short-term nature of these accounts. The Company had
no
cash equivalents at
December 31, 2016
or
2015
.
The carrying value and estimated fair value of the Company’s long-term debt are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Borrowings under revolving credit facility
|
$
|
38,566
|
|
|
$
|
38,566
|
|
|
$
|
25,148
|
|
|
$
|
25,148
|
|
Term loan
|
9,833
|
|
|
9,833
|
|
|
25,398
|
|
|
25,398
|
|
The carrying value of borrowings under the revolving credit facility and the term loan approximate their fair value because the interest rate is variable.
Note 14 — Earnings (Loss) Per Share
Basic
earnings (loss)
per common share is calculated by dividing net
income (loss)
by the weighted average number of common shares outstanding for the period. Diluted
earnings (loss)
per common share is calculated by dividing net
income
(loss)
by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.
Basic and diluted
earnings (loss)
per common share are as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Income from continuing operations
|
$
|
1,907
|
|
|
$
|
7,158
|
|
|
$
|
39,622
|
|
(Loss) income from discontinued operations, net of tax
|
(51,037
|
)
|
|
(20,620
|
)
|
|
13,981
|
|
Net (loss) income - Basic and Diluted
|
$
|
(49,130
|
)
|
|
$
|
(13,462
|
)
|
|
$
|
53,603
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - Basic
|
56,087
|
|
|
54,459
|
|
|
54,511
|
|
Assumed conversions:
|
|
|
|
|
|
Incremental common shares from warrants
|
—
|
|
|
—
|
|
|
121
|
|
Incremental common shares from stock options
|
197
|
|
|
527
|
|
|
880
|
|
Incremental common shares from restricted stock units
|
66
|
|
|
6
|
|
|
14
|
|
Weighted average common shares outstanding - Diluted
|
56,350
|
|
|
54,992
|
|
|
55,526
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
Continuing operations
|
$
|
0.03
|
|
|
$
|
0.13
|
|
|
$
|
0.73
|
|
Discontinued operations, net of tax
|
(0.91
|
)
|
|
(0.38
|
)
|
|
0.26
|
|
Basic earnings (loss) per common share
|
$
|
(0.88
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
0.99
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
Continuing operations
|
$
|
0.03
|
|
|
$
|
0.13
|
|
|
$
|
0.71
|
|
Discontinued operations, net of tax
|
(0.91
|
)
|
|
(0.37
|
)
|
|
0.25
|
|
Diluted earnings (loss) per common share
|
$
|
(0.88
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.96
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Income Taxes
Components of the income tax expense (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
442
|
|
|
$
|
3,944
|
|
|
$
|
19,150
|
|
State
|
(85
|
)
|
|
390
|
|
|
(13
|
)
|
Foreign
|
(526
|
)
|
|
1,841
|
|
|
242
|
|
Total current
|
(169
|
)
|
|
6,175
|
|
|
19,379
|
|
Deferred:
|
|
|
|
|
|
Federal
|
1,564
|
|
|
(2,628
|
)
|
|
(984
|
)
|
State
|
(112
|
)
|
|
(63
|
)
|
|
(1,147
|
)
|
Foreign
|
(46
|
)
|
|
(8
|
)
|
|
—
|
|
Total deferred
|
1,406
|
|
|
(2,699
|
)
|
|
(2,131
|
)
|
Income tax expense
|
$
|
1,237
|
|
|
$
|
3,476
|
|
|
$
|
17,248
|
|
The components of income before income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
4,502
|
|
|
$
|
4,760
|
|
|
$
|
56,729
|
|
Foreign
|
(1,358
|
)
|
|
5,874
|
|
|
141
|
|
Income before income taxes
|
$
|
3,144
|
|
|
$
|
10,634
|
|
|
$
|
56,870
|
|
A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Federal statutory tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
(5.3
|
)
|
|
2.0
|
|
|
(2.0
|
)
|
Non-U.S. income taxed at different rates
|
1.2
|
|
|
(4.4
|
)
|
|
—
|
|
Return to accrual adjustments
|
(2.3
|
)
|
|
(3.8
|
)
|
|
(0.2
|
)
|
Change in valuation allowance
|
0.3
|
|
|
0.1
|
|
|
—
|
|
Domestic production activities deduction
|
—
|
|
|
—
|
|
|
(3.0
|
)
|
Net operating loss carryback adjustment
|
10.0
|
|
|
1.4
|
|
|
—
|
|
Other
|
0.4
|
|
|
2.4
|
|
|
0.5
|
|
Effective income tax rate
|
39.3
|
%
|
|
32.7
|
%
|
|
30.3
|
%
|
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact and changes in state apportionment factors, including the effect on state deferred tax assets and liabilities. Changes in the effective tax rate also included the benefit of non-U.S. income taxed at lower rates during 2015, and the Company not qualifying for the domestic production activities deduction during 2016 and 2015. The benefit of operating in foreign tax jurisdictions is primarily derived from operations in Canada.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the tax effect of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. The components of deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
21,212
|
|
|
$
|
15,210
|
|
Allowance for doubtful accounts
|
1,582
|
|
|
432
|
|
Inventory valuation reserves
|
2,205
|
|
|
3,734
|
|
Equity compensation
|
3,161
|
|
|
4,250
|
|
Goodwill
|
10,788
|
|
|
6,869
|
|
Accrued compensation
|
80
|
|
|
73
|
|
Foreign tax credit carryforward
|
2,365
|
|
|
865
|
|
Other
|
76
|
|
|
67
|
|
Total gross deferred tax assets
|
41,469
|
|
|
31,500
|
|
Valuation allowance
|
(1,053
|
)
|
|
(1,093
|
)
|
Total deferred tax assets, net
|
40,416
|
|
|
30,407
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment
|
(7,264
|
)
|
|
(12,876
|
)
|
Intangible assets
|
(13,375
|
)
|
|
(18,249
|
)
|
Convertible debt
|
(2,010
|
)
|
|
(3,011
|
)
|
Unearned revenue
|
(4,535
|
)
|
|
—
|
|
Prepaid insurance and other
|
(338
|
)
|
|
(216
|
)
|
Total gross deferred tax liabilities
|
(27,522
|
)
|
|
(34,352
|
)
|
Net deferred tax assets (liabilities)
|
$
|
12,894
|
|
|
$
|
(3,945
|
)
|
Deferred taxes are presented in the balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Current deferred tax assets
|
$
|
52
|
|
|
$
|
2,649
|
|
Non-current deferred tax assets
|
16,215
|
|
|
17,229
|
|
Current deferred tax liabilities
|
(3,373
|
)
|
|
—
|
|
Non-current deferred tax liabilities
|
—
|
|
|
(23,823
|
)
|
Net deferred tax (liabilities) assets
|
$
|
12,894
|
|
|
$
|
(3,945
|
)
|
Note 17 — 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:
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
Shares issued at the beginning of the year
|
56,220,214
|
|
|
54,633,726
|
|
Issued in sale of common stock
|
2,450,339
|
|
|
—
|
|
Issued in acquisitions
|
247,764
|
|
|
60,024
|
|
Issued in payment of accrued liability
|
20,000
|
|
|
—
|
|
Issued as restricted stock award grants
|
632,240
|
|
|
758,904
|
|
Issued upon exercise of stock options
|
114,112
|
|
|
767,560
|
|
Shares issued at the end of the year
|
59,684,669
|
|
|
56,220,214
|
|
Stock-Based Incentive Plans
Stockholders approved long term incentive plans in 2014, 2010, 2007, 2005, and 2003 (the “2014 Plan,” the “2010 Plan,” the “2007 Plan,” the “2005 Plan” and the “2003 Plan,” respectively) under which the Company may grant equity awards to officers, key employees, and non-employee directors in the form of stock options, restricted stock, and certain other incentive awards. The maximum number of shares that may be issued under the 2014 Plan, 2010 Plan, and 2007 Plan are
5.2 million
,
6.0 million
, and
2.2 million
, respectively. At
December 31, 2016
, the Company had a total
of
1.8 million
shares remaining to be granted under the 2014 Plan, 2010 Plan, and 2007 Plan. Shares may no longer be granted under the 2005 Plan and 2003 Plan.
Stock Options
All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant. Options expire no later than
ten years
from the date of grant and generally vest in
four years
or less. Proceeds received from stock option exercises are credited to common stock and additional paid-in capital, as appropriate. The
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company uses historical data to estimate pre-vesting option forfeitures. Estimates are adjusted when actual forfeitures differ from the estimate. Stock-based compensation expense is recorded for all equity awards expected to vest.
The fair value of stock options at the date of grant is calculated using the Black-Scholes option pricing model. The risk free interest rate is based on the implied yield of U.S. Treasury zero-coupon securities that correspond to the expected life of the option. Volatility is estimated based on historical and implied volatilities of the Company’s stock and of identified companies considered to be representative peers of the Company. The expected life of awards granted represents the period of time the options are expected to remain outstanding. The Company uses the “simplified” method which is permitted
for companies that cannot reasonably estimate the expected life of options based on historical share option exercise experience. The Company does not expect to pay dividends on common stock. No options were granted to employees during
2016
,
2015
, and
2014
.
The Black-Scholes option valuation model was developed to estimate the fair value of traded options that have no vesting restrictions and are fully-transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value calculation. The Company’s options are not characteristic of traded options; therefore, the option valuation models do not necessarily provide a reliable measure of the fair value of options.
Stock option activity for the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
|
Outstanding as of January 1, 2016
|
|
777,400
|
|
|
$
|
7.80
|
|
|
|
|
|
Exercised
|
|
(114,112
|
)
|
|
1.62
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
663,288
|
|
|
$
|
8.87
|
|
|
0.42
|
|
$
|
348,067
|
|
Vested or expected to vest at
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
663,288
|
|
|
$
|
8.87
|
|
|
0.42
|
|
$
|
348,067
|
|
Options exercisable as of
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
663,288
|
|
|
$
|
8.87
|
|
|
0.42
|
|
$
|
348,067
|
|
The total intrinsic value of stock options exercised during the years ended
December 31, 2016
,
2015
, and
2014
was
$1.0 million
,
$8.4 million
, and
$6.0 million
, respectively.
No
stock options vested during the year ended
December 31, 2016
. The total fair value of stock options vesting during the year ended
December 31, 2014
was less than
$0.1 million
.
At
December 31, 2016
, the Company had recognized all compensation expense related to stock options.
Restricted Stock
The Company grants employees either time-vesting or performance-based restricted shares in accordance with terms
specified in the Restricted Stock Agreements (“RSAs”). Time-vesting restricted shares vest after a stipulated period of time has elapsed subsequent to the date of grant, generally
three
to
four
years. Certain time-vested shares have also been issued with a portion of the shares granted vesting immediately. Performance-based restricted shares are issued with performance criteria defined over a designated performance period and vest only when, and if, the outlined performance criteria are met. During the year ended
December 31, 2016
, approximately
41%
of the restricted shares granted were time-vesting and
59%
were performance-based. Grantees of restricted shares retain voting rights for the granted shares.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock share activity for the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
Restricted Stock Shares
|
|
Shares
|
|
Weighted-
Average Fair
Value at Date of
Grant
|
Non-vested at January 1, 2016
|
|
899,216
|
|
|
$
|
18.21
|
|
Granted to employees
|
|
246,191
|
|
|
11.92
|
|
Granted to service provider
|
|
20,000
|
|
|
11.21
|
|
RSAs converted from 2015 restricted stock units
|
|
386,049
|
|
|
21.96
|
|
Vested
|
|
(772,267
|
)
|
|
19.93
|
|
Forfeited
|
|
(95,947
|
)
|
|
18.22
|
|
Non-vested at December 31, 2016
|
|
683,242
|
|
|
$
|
15.92
|
|
The weighted-average grant-date fair value of restricted stock granted during the years ended
December 31, 2016
,
2015
, and
2014
was
$11.92
,
$16.15
, and
$27.29
per share, respectively. The total fair value of restricted stock that vested during the years ended
December 31, 2016
,
2015
, and
2014
was
$15.4 million
,
$13.7 million
, and
$10.2 million
, respectively.
At
December 31, 2016
, there was
$7.9 million
of unrecognized compensation expense related to non-vested restricted stock.
The unrecognized compensation expense is expected to be recognized over a weighted-average period of
1.3 years
.
Restricted Stock Units
During the year ended
December 31, 2016
, the Company granted performance-based restricted stock units (“RSUs”) for
768,393
shares equivalents. The performance period for these share equivalents continues until December 31, 2017.
Restricted stock unit share activity for the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
Restricted Stock Unit Shares
|
|
Shares
|
|
Weighted-
Average Fair
Value at Date of
Grant
|
RSU share equivalents at January 1, 2016
|
|
386,049
|
|
|
$
|
21.96
|
|
2015 RSUs converted to RSAs in 2016
|
|
(386,049
|
)
|
|
21.96
|
|
Share equivalents granted in 2016
|
|
768,393
|
|
|
12.02
|
|
RSU share equivalents at December 31, 2016
|
|
768,393
|
|
|
$
|
12.02
|
|
At
December 31, 2016
, there was
$6.9 million
of unrecognized compensation expense related to
2016
restricted stock units. The unrecognized compensation expense is expected to be recognized over a weighted-average period of
2.0 years
.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (ESPP) was approved by stockholders on May 18, 2012. The Company registered
500,000
shares of its common stock, currently held as treasury shares, for issuance under the ESPP. The purpose of the ESPP is to provide employees with an opportunity to purchase shares of the Company’s common stock through accumulated payroll deductions. The ESPP allows participants to purchase common stock at a purchase price equal to
85%
of the fair market value of the common stock on the last business day of a
three
-month offering period which coincides with calendar quarters. Payroll deductions may not exceed
10%
of an employee’s compensation and participants may not purchase more than
1,000
shares in any one offering period. The fair value of the discount associated with shares purchased under the plan is recognized as share-based compensation expense and was
$0.1 million
,
$0.2 million
, and
$0.2 million
during the years ended
December 31, 2016
,
2015
, and
2014
, respectively. The total fair value of the shares purchased under the plan during the years ended
December 31, 2016
,
2015
, and
2014
was
$1.0 million
,
$1.0 million
, and
$1.1 million
, respectively. The employee payment associated with participation in the plan was satisfied through payroll deductions.
Share-Based Compensation Expense
Non-cash share-based compensation expense related to stock options, restricted stock, restricted stock unit grants, and stock purchased under the Company’s ESPP was
$12.1 million
,
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$13.1 million
, and
$9.1 million
during the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
Treasury Stock
The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. During the years ended
December 31, 2016
,
2015
, and
2014
, the Company purchased
238,216
shares,
473,304
shares, and
243,005
shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options. Shares issued as restricted stock awards to employees that were forfeited are accounted for as treasury stock. During the years ended
December 31, 2016
,
2015
, and
2014
, shares surrendered for the exercise of stock options were
3,225
,
106,810
, and
46,208
, respectively. These surrendered shares are also accounted for as treasury stock.
Retirement of Treasury Stock
On December 31, 2014, the Company retired
5,873,291
shares of its treasury stock with an aggregate cost of
$32.6 million
. The retirement was recorded as reductions of
$32.6 million
in treasury stock,
$1,000
in common stock, and
$32.6 million
in additional paid-in capital.
All retired treasury shares were canceled and returned to the status of authorized but unissued shares. The retirement of treasury stock had no impact on the Company’s total consolidated stockholders’ equity.
Stock Repurchase Program
In November 2012, the Company’s Board of Directors authorized the repurchase of up to
$25 million
of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. During the year ended December 31, 2016, the Company did
not
repurchase any shares of its outstanding common stock. During the year ended December 31, 2015, the Company repurchased
799,723
shares of its outstanding common stock on the open market at a cost of
$9.7 million
, inclusive of transaction costs, or an average price of
$12.13
per share. During the year ended December 31, 2014, the Company repurchased
621,176
shares of its outstanding common stock on the open market at a cost of
$10.4 million
, inclusive of transaction costs, or an average price of
$16.74
per share.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional
$50 million
of the Company’s common stock. Repurchases may be made in open market or through privately negotiated transactions. Through
December 31, 2016
, the Company has
not
repurchased any of its common stock under this authorization.
At
December 31, 2016
, the Company has
$54.9 million
remaining under its share repurchase program. A covenant under the Company’s Credit Facility limits the amount that may be used to repurchase the Company’s common stock. At
December 31, 2016
, this covenant limits additional share repurchases to
$4.9 million
.
Note 18 — Commitments and Contingencies
Class Action Litigation
In November 2015,
four
putative securities class action lawsuits were filed in the United States District Court for the Southern District of Texas against the Company and certain of its officers. The lawsuits have been consolidated into a single case, and an amended complaint has been filed. The amended complaint asserts that the Company made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. The complaint seeks an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between October 23, 2014 and November 9, 2015, inclusive.
In January 2016,
three
derivative lawsuits were filed,
two
in the District Court of Harris County, Texas (which have since been consolidated into
one
case), and
one
in the United States District Court for the Southern District of Texas, on behalf of the Company against certain of its officers and its current directors. The lawsuits allege violations of law, breaches of fiduciary duty, and unjust enrichment against the defendants.
The Company believes the class action lawsuit and the derivative lawsuits are without merit, and it intends to vigorously defend against all claims asserted. Discovery has not yet commenced. At this time, the Company is unable to reasonably estimate the outcome of this litigation.
In addition, the U.S. Securities and Exchange Commission has opened an inquiry related to similar issues to those raised in the above-described litigation.
Other Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. Management is not
aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Legal Settlement
In December 2016, the Company reached a settlement with a stockholder related to disgorgement of potential short-swing profits under Section 16(b) of the Securities Exchange Act of
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1934 in connection with purchases and sales of Company securities. As a result of the settlement, the Company recorded a gain of
$12.7 million
.
Operating Lease Commitments
The Company has operating leases for office space, vehicles, and equipment. Future minimum lease payments under operating leases at
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
|
Minimum
Lease
Payments
|
2017
|
|
$
|
2,750
|
|
2018
|
|
2,477
|
|
2019
|
|
2,246
|
|
2020
|
|
2,024
|
|
2021
|
|
1,972
|
|
Thereafter
|
|
12,496
|
|
Total
|
|
$
|
23,965
|
|
Rent expense under operating leases totaled
$3.3 million
,
$2.6 million
, and
$2.2 million
during the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
401(k) Retirement Plan
The Company maintains a 401(k) retirement plan for the benefit of eligible employees in the U.S. All employees are
eligible to participate in the plan upon employment. On January 1, 2015, the Company implemented a new matching program. The Company matches contributions at
100%
of up to
2%
of an employee’s compensation and, if greater, the Company matches contributions at
50%
from
4%
to
8%
of an employee’s compensation.
During the years ended
December 31, 2016
,
2015
, and
2014
, compensation expense included
$1.0 million
,
$1.0 million
and
$0.7 million
, respectively, related to the Company’s 401(k) match.
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from the oil and gas industry. Customers include major oilfield services companies, major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies, and state-owned national oil companies. This concentration of customers in one industry increases credit and business risks.
The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is maintained at a major financial institution and balances often exceed insurable amounts.
Note 19 — Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by chief operating decision-makers in deciding how to allocate resources and assess performance. The operations of the Company are categorized into
two
reportable segments: Energy Chemistry Technologies and Consumer and Industrial Chemistry Technologies.
|
|
•
|
Energy Chemistry Technologies designs, develops, manufactures, packages, and markets specialty chemistries used in oil and natural gas well drilling, cementing, completion, stimulation, and production. In addition, the Company’s chemistries are used in specialized enhanced and improved oil recovery markets (“EOR” or “IOR”). Activities in this segment also include construction and management of automated material handling facilities and management
|
of loading facilities and blending operations for oilfield services companies.
|
|
•
|
Consumer and Industrial Chemistry Technologies designs, develops, and manufactures products that are sold to companies in the flavor and fragrance industry and the specialty chemical industry. These technologies are used by beverage and food companies, fragrance companies, and companies providing household and industrial cleaning products.
|
The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income. Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to reportable segments.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of the reportable segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31,
|
|
Energy Chemistry Technologies
|
|
Consumer and Industrial Chemistry Technologies
|
|
Corporate and
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
188,233
|
|
|
$
|
74,599
|
|
|
$
|
—
|
|
|
$
|
262,832
|
|
Gross margin
|
|
74,592
|
|
|
16,086
|
|
|
—
|
|
|
90,678
|
|
Income (loss) from operations
|
|
29,014
|
|
|
9,664
|
|
|
(45,982
|
)
|
|
(7,304
|
)
|
Depreciation and amortization
|
|
5,935
|
|
|
2,257
|
|
|
2,237
|
|
|
10,429
|
|
Capital expenditures
|
|
10,674
|
|
|
888
|
|
|
2,398
|
|
|
13,960
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
213,592
|
|
|
$
|
56,374
|
|
|
$
|
—
|
|
|
$
|
269,966
|
|
Gross margin
|
|
81,935
|
|
|
14,371
|
|
|
—
|
|
|
96,306
|
|
Income (loss) from operations
|
|
43,902
|
|
|
8,742
|
|
|
(40,366
|
)
|
|
12,278
|
|
Depreciation and amortization
|
|
4,791
|
|
|
2,202
|
|
|
1,742
|
|
|
8,735
|
|
Capital expenditures
|
|
12,803
|
|
|
568
|
|
|
3,020
|
|
|
16,391
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
268,761
|
|
|
$
|
51,091
|
|
|
$
|
—
|
|
|
$
|
319,852
|
|
Gross margin
|
|
117,867
|
|
|
12,897
|
|
|
—
|
|
|
130,764
|
|
Income (loss) from operations
|
|
84,846
|
|
|
6,558
|
|
|
(32,785
|
)
|
|
58,619
|
|
Depreciation and amortization
|
|
4,401
|
|
|
2,138
|
|
|
1,174
|
|
|
7,713
|
|
Capital expenditures
|
|
6,983
|
|
|
115
|
|
|
2,241
|
|
|
9,339
|
|
Assets of the Company by reportable segments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Energy Chemistry Technologies
|
$
|
184,328
|
|
|
$
|
153,447
|
|
Consumer and Industrial Chemistry Technologies
|
98,105
|
|
|
93,038
|
|
Corporate and Other
|
60,255
|
|
|
40,633
|
|
Total segments
|
342,688
|
|
|
287,118
|
|
Held for sale
|
43,900
|
|
|
115,972
|
|
Total Assets
|
$
|
386,588
|
|
|
$
|
403,090
|
|
Geographic Information
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
U.S.
|
$
|
210,890
|
|
|
$
|
227,117
|
|
|
$
|
262,430
|
|
Other countries
|
51,942
|
|
|
42,849
|
|
|
57,422
|
|
Total
|
$
|
262,832
|
|
|
$
|
269,966
|
|
|
$
|
319,852
|
|
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Customer A
|
15.7%
|
|
17.2%
|
|
9.9%
|
Customer B
|
13.2%
|
|
14.6%
|
|
22.1%
|
Customer C
|
6.9%
|
|
10.6%
|
|
2.1%
|
Approximately
95%
of the revenue from major customers noted above was from the Energy Chemistry Technologies segment.
Note 20 — Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
|
(in thousands, except per share data)
|
2016
|
|
|
|
|
|
|
|
|
|
Revenue
(1)
|
$
|
63,812
|
|
|
$
|
64,079
|
|
|
$
|
64,337
|
|
|
$
|
70,604
|
|
|
$
|
262,832
|
|
Gross margin
(1)
|
23,794
|
|
|
21,718
|
|
|
22,354
|
|
|
22,812
|
|
|
90,678
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
(1)
|
$
|
(29
|
)
|
|
$
|
(111
|
)
|
|
$
|
(1,870
|
)
|
|
$
|
3,917
|
|
|
$
|
1,907
|
|
Income (loss) from discontinued operations, net of tax
|
(30,156
|
)
|
|
(2,169
|
)
|
|
(876
|
)
|
|
(17,836
|
)
|
|
(51,037
|
)
|
Net (loss) income
|
$
|
(30,185
|
)
|
|
$
|
(2,280
|
)
|
|
$
|
(2,746
|
)
|
|
$
|
(13,919
|
)
|
|
$
|
(49,130
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
(2)
:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
Discontinued operations
|
(0.55
|
)
|
|
(0.04
|
)
|
|
(0.02
|
)
|
|
(0.31
|
)
|
|
(0.91
|
)
|
Basic earnings (loss) per common share
|
$
|
(0.55
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.88
|
)
|
Diluted earnings (loss) per common share
(2)
:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
Discontinued operations
|
(0.55
|
)
|
|
(0.04
|
)
|
|
(0.02
|
)
|
|
(0.31
|
)
|
|
(0.91
|
)
|
Diluted earnings (loss) per common share
|
$
|
(0.55
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.88
|
)
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts exclude impact of discontinued operations.
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
|
(in thousands, except per share data)
|
2015
|
|
|
|
|
|
|
|
|
|
Revenue
(1)
|
$
|
60,106
|
|
|
$
|
71,949
|
|
|
$
|
74,048
|
|
|
$
|
63,863
|
|
|
$
|
269,966
|
|
Gross margin
(1)
|
19,806
|
|
|
24,552
|
|
|
27,339
|
|
|
24,609
|
|
|
96,306
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
(1)
|
$
|
(515
|
)
|
|
$
|
2,770
|
|
|
$
|
3,589
|
|
|
$
|
1,314
|
|
|
$
|
7,158
|
|
Income (loss) from discontinued operations, net of tax
|
(1,000
|
)
|
|
(15,317
|
)
|
|
(1,614
|
)
|
|
(2,689
|
)
|
|
(20,620
|
)
|
Net (loss) income
|
$
|
(1,515
|
)
|
|
$
|
(12,547
|
)
|
|
$
|
1,975
|
|
|
$
|
(1,375
|
)
|
|
$
|
(13,462
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
(2)
:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.01
|
)
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.13
|
|
Discontinued operations
|
(0.02
|
)
|
|
(0.28
|
)
|
|
(0.03
|
)
|
|
(0.05
|
)
|
|
(0.38
|
)
|
Basic earnings (loss) per common share
|
$
|
(0.03
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.25
|
)
|
Diluted earnings (loss) per common share
(2)
:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.01
|
)
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.13
|
|
Discontinued operations
|
(0.02
|
)
|
|
(0.28
|
)
|
|
(0.03
|
)
|
|
(0.05
|
)
|
|
(0.37
|
)
|
Diluted earnings (loss) per common share
|
$
|
(0.03
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts exclude impact of discontinued operations.
|
(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.
|