KLX Energy Services Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; financial figures are in millions of U.S. dollars unless stated otherwise. KLX provides oilfield services and products to onshore oil and gas operators across U.S. basins.
Financial performance
- Q3 revenue was $220.6, down 0.5% from $221.6. Net income was $7.6, compared with $11.1; diluted EPS was $0.47 versus $0.96.
- Nine-month revenue was $694.2, up 24.3% from $558.3. Net income was $28.4, versus a net loss of $16.3; diluted EPS was $1.82 versus a loss of $1.49 per share.
- Margins: Gross margin was 24.7% in Q3 versus 23.8% a year earlier, and 25.0% year to date versus 18.6%. Operating margin was 7.4% in Q3 versus 9.2%, and 7.9% year to date versus 1.8%. Net margin was 3.4% in Q3 versus 5.0%, and 4.1% year to date versus negative 2.9%.
- Operating cash flow for nine months was $77.0 versus $3.9. Investing cash flow was negative $29.9, including $44.3 of capital expenditures; financing cash flow was negative $14.1. Cash increased $33.0 to $90.4. Operating cash flow less capital expenditures was $32.7, compared with negative $22.2 in 2022.
- Liquidity and debt: Cash of $90.4 plus $64.4 available under the ABL facility gave reported liquidity of $154.8. Debt was $284.1 net of issuance costs ($287.3 principal), comprising $237.3 of 11.5% senior secured notes and $50.0 drawn on the ABL. The balance sheet also reported $40.9 of finance lease obligations and $28.0 of operating lease obligations.
- Total assets were $524.3, up from $465.9 at year-end 2022; stockholders’ equity was $47.8, versus a deficit of $15.8.
Changes and significant items
- Q3 revenue was nearly flat: Rocky Mountains revenue increased 15.8% and Southwest increased 13.6%, while Northeast/Mid-Con declined 24.0%. Management attributed the latter decrease mostly to lower volume.
- Q3 operating income declined to $16.4 from $20.4, and net income fell accordingly. Rocky Mountains operating income improved, but Northeast/Mid-Con and Southwest operating income declined.
- Nine-month revenue growth reflected improved activity and pricing; management attributed approximately 94% of the increase to higher weighted-average prices. Operating income rose to $54.9 from $10.3, with improvement in all three segments.
- Cost of sales as a share of revenue improved year to date, while SG&A rose to $66.8 from $51.0, including acquisition-related costs, higher headcount and inflation.
- KLX acquired Greene’s Energy Group on March 8, 2023, in an all-stock transaction involving approximately 2.4 million shares and $1.1 cash after adjustment. The company reported a $1.9 bargain-purchase gain, said integration was complete, and reported approximately $3.0 in annual cost synergies implemented.
- Capital expenditures were $44.3 for the first nine months, compared with $26.1 in 2022. The company expects full-year 2023 capital expenditures of $45–$55, including $35–$45 for maintenance.
Outlook, risks and contingencies
- Management said current forecasts, cash on hand, ABL availability and operating cash flows are expected to fund operations and planned capital expenditures for at least the next 12 months. It cautioned that improved liquidity beyond that period is uncertain. No revenue or earnings guidance is provided in the filing text.
- Management described volatile, cyclical demand, inflation in goods and labor, and a U.S. rig count down 20% from December 31, 2022. Higher service pricing helped offset cost pressures. Commodity prices, customer activity, competition, weather, labor availability and broader economic conditions may affect results.
- Both the ABL facility and senior secured notes mature in 2025. The ABL maturity is August 1, 2025 if the notes remain outstanding, otherwise September 15, 2025. The notes carry an 11.5% coupon; refinancing may be unavailable or more expensive, and equity or debt transactions could dilute shareholders or increase leverage.
- Environmental matters and ordinary-course litigation are disclosed; management does not expect them to have a material adverse effect. Certain indemnities and guarantees are not readily quantifiable, and no significant amounts were accrued. Disclosure controls were deemed effective at September 30, 2023.
Important facts for investors to verify
- Progress and terms for refinancing or repaying the 2025 notes and ABL facility, including borrowing availability and interest costs.
- Whether cash generation and reported liquidity can be sustained as activity, customer collections, commodity prices and working-capital needs change.
- Whether the expected capital-spending range and Greene’s synergies are realized, and how acquisition accounting values are finalized by the first quarter of 2024.
- Regional activity and pricing trends, particularly the Northeast/Mid-Con slowdown and whether Q3 margin and earnings pressure persists.