KLX Energy Services Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended July 31, 2020. Amounts are in millions of U.S. dollars, except per-share data. KLX provides oilfield services to U.S. onshore oil and gas operators. The QES merger closed July 28; reported results include QES only for July 29–31, 2020, so reported-period comparisons are not on a combined-company basis.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $36.2 | $164.9 | $119.2 | $310.7 |
| Operating income (loss), as reported | $(12.8) | $11.0 | $(248.4) | $13.4 |
| Net income (loss) | $(20.4) | $3.5 | $(263.5) | $(1.5) |
| Diluted EPS | $(4.12) | $0.78 | $(55.00) | $(0.34) |
| Operating cash flow | Not separately shown for the quarter | $(15.5) | $11.9 |
- Q2 cost of sales was $48.1, or 132.9% of revenue, versus 78.5% a year earlier; the steep activity decline left the company with negative operating leverage. SG&A was $41.8, including merger-related non-recurring costs.
- Reported operating loss includes a $41.1 bargain purchase gain on QES. Excluding that gain, Q2 operating loss was $53.9; six-month operating loss excluding the gain was $289.5.
- The six-month net loss included $208.7 of goodwill and long-lived asset impairment charges. Goodwill was fully impaired; the filing attributes $180.4 to long-lived assets and $28.3 to goodwill.
- At July 31, cash was $98.5; current assets were $179.5 and current liabilities $74.1, with reported net working capital of $6.9. Total assets were $425.1 and stockholders’ equity $99.7.
- Debt comprised $250.0 principal of 11.5% senior secured notes due 2025, carried at $243.4 net of issuance costs. The $100.0 asset-based revolver had no borrowings; availability was $14.9, with $6.3 of letters of credit outstanding.
- Six-month investing cash outflow was $9.1, including $8.5 of capital expenditures and $9.7 to repay QES revolving debt and related fees, partly offset by other items. Cash declined $25.0 from January 31.
Material changes and unusual items
- Revenue fell 78.0% year over year in Q2 and 61.6% in the first half, reflecting reduced customer activity and pricing pressure. All three regions declined; Q2 Southwest revenue fell 92.1%, Rocky Mountains 71.7%, and Northeast/Mid-Con 70.9%.
- The QES all-stock merger expanded the combined business. KLXE stockholders owned approximately 59% and former QES stockholders 41% on a fully diluted basis. The preliminary purchase-price allocation generated the $41.1 bargain gain and remains subject to finalization.
- Merger-related charges included $28.1 in Q2 for accelerated stock compensation, severance, and legal and professional fees. Merger-related accelerated vesting contributed $15.1 of stock-based compensation expense in Q2.
- A 1-for-5 reverse stock split became effective July 28, 2020; per-share and share data in the filing are retrospectively adjusted.
- The company recorded $2.7 of accelerated amortization in Q2 after forecasting approximately 50% declines in future revenue contributions from certain customer relationships.
Outlook, risks and contingencies
- Management expected at least $40.0 in annualized merger cost savings, with the savings expected to be fully implemented on a run-rate basis by the end of fiscal Q1 2021, ahead of the original schedule.
- Fiscal 2021 capital expenditures were expected to be $15.0–$20.0, subject to industry conditions. Management said it expected significant further activity declines in Q3 and lower activity and pricing until clearer signs of commodity recovery.
- Management believed cash and revolver availability would fund operations and planned capital expenditures for at least the next 12 months, but cautioned that sustained positive operating cash flow was uncertain. Liquidity and borrowing-base availability depend on activity, receivables, collections, and customer creditworthiness.
- Key risks include COVID-19 and oil-price volatility, further customer capital-spending cuts or defaults, reduced access to financing, and the ability to integrate QES, retain customers and suppliers, and achieve planned synergies. The North American onshore rig count fell 68% in the first half; WTI was $40.10 per barrel at July 31, down 31% from a year earlier.
- Merger-related stockholder lawsuits were voluntarily dismissed; the company and QES later agreed to settle related mootness-fee claims for an immaterial amount. Management reported no other litigation expected to have a material adverse effect. No federal tax benefit was recognized on losses because of a valuation allowance.
Important facts for investors to verify
- Whether merger synergies are realized on schedule and at the stated annualized level, and what integration costs remain.
- Whether cash use, operating performance, and borrowing-base availability remain adequate as customer activity and receivables change.
- The final QES purchase-price allocation and any resulting adjustments to the bargain gain or acquired asset values.
- Whether impairment assumptions, customer forecasts, and the planned capital-spending range remain appropriate under current oilfield conditions.
- How results evolve on a combined-company basis; Q2 reported revenue includes only three days of QES operations.