Flotek Industries, Inc. :FTK-US: Earnings Analysis: Q3, 2017 By the Numbers : January 3, 2018

Flotek Industries, Inc. reports financial results for the quarter ended September 30, 2017.

Highlights

  • Summary numbers: Revenues of USD 79.46 million, Net Earnings of USD -3.42 million.
  • Gross margins narrowed from 30.76% to 24.16% compared to the same period last year, operating (EBITDA) margins now -0.02% from -0.94%.
  • Change in operating cash flow of 245.26% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Earnings decline largely a result of non-operational activity, pretax margins improved from -6.73% to -4.28%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-09-30 2017-06-30 2017-03-31 2016-12-31 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 79.46 85.18 79.95 70.6 73.68
Revenue Growth (%YOY) 7.84 17.78 10.6 -8.32 -16.22
Earnings (mil) -3.42 -1.12 -0.74 3.92 -2.75
Earnings Growth (%YOY) -24.58 50.79 97.54 384.87 -239.04
Net Margin (%) -4.31 -1.32 -0.93 5.55 -3.73
EPS -0.06 -0.05 -0.21 -0.24 -0.05
Return on Equity (%) -1.24 -0.4 -0.26 1.33 -0.97
Return on Assets (%) -3.86 -1.22 -0.78 4.07 -2.94

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, FTK-US’s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if FTK-US’s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by -6.71% and earnings by -204.90% compared to the previous period.

Earnings Growth Analysis

The company’s year-on-year earnings decline was driven by the drop in gross margins from 30.76% to 24.16%. This drop in earnings would have been worse were in not for operational cost control activities, which helped the operating margins (EBITDA margins) improve from -0.94% to -0.02%. For comparison purposes, gross margins were 27.72% and EBITDA margins were 2.30% in the previous period.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

FTK-US’s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days are now 85.87 days from 97.73 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

FTK-US’s year-on-year change in operating cash flow of 245.26% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

The company’s earnings decline is largely a result of non-operational activity. As a matter of fact, the company showed increases in operating (EBIT) and pretax margins. EBIT margins improved from -5.83% to -3.92% and pretax margins widened from -6.73% to -4.28%.

EBIT Margin History
PreTax Margin History

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Company Profile

Flotek Industries, Inc. is a technology-driven company. It develops and supplies chemistry and services to the oil and gas industries, and companies that make cleaning products, cosmetics, food and beverages, and other products that are sold in consumer and industrial markets. The company operates through the following segments: Energy Chemical Technologies, and Consumer and Industrial Chemical Technologies. The Energy Chemical Technologies segment designs, develops, manufactures, packages, and markets chemistries for use in oil and gas well drilling, cementing, completion, and stimulation activities designed to maximize recovery in both new and mature fields. The Consumer and Industrial Chemical Technologies segment designs, develops, and manufactures products that are sold to companies in the flavor and fragrance industries and specialty chemical industry. Flotek Industries was founded on May 17, 1985 and is headquartered in Houston, TX.

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