Will Flotek Industries Reduce Its Debt?

Flotek Industries’ (FTK) net debt-to-trailing 12 month adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) rose from 2Q15 to 2Q16.

Net debt-to-EBITDA reflects how easily a company can repay its debt from its operational earnings and available cash. Flotek Industries’ peer RPC’s (RES) net debt was -$141 million at the end of 2Q16, compared to FTK’s $61 million.

RPC has no long-term debt and a positive cash balance, leading to its negative net debt.

FTK makes up 0.13% of the iShares Core S&P Small-Cap ETF (IJR).

FTK’s net debt-to-adjusted EBITDA ratio trended upward from 3Q14 to 3Q15. In 4Q15 and 1Q16, FTK’s adjusted EBITDA was negative, so its net debt-to-EBITDA multiples weren’t meaningful.

In 2Q16, FTK’s total debt rose by ~25% compared to a year ago. Its cash and marketable securities rose by 55% during the same period. In effect, the company’s net debt rose by 23%. Its adjusted EBITDA fell in 2Q16 compared to a year ago, making its net debt-to-EBITDA ratio significantly higher in the past year. Adjusted EBITDA excludes impairments and other non-recurring charges.

In July 2016, Flotek Industries announced a $30 million private placement of its equity. FTK plans to use the amount raised from the equity issuance for the following:

• to fund its acquisition of International Polymerics for $7.9 million
• to reduce the balance on its revolving line of credit
• to fund new growth initiatives

FTK can now use the remainder of its new equity proceeds to meet its second and third objectives. FTK’s debt reduction is expected to strengthen its balance sheet.

Next, let’s discuss Flotek Industries’ free cash flow.