KLX Energy Services Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2019 (fiscal first quarter), compared with the three months ended April 30, 2018. The company provides completion, intervention and production services to U.S. onshore oil and gas producers. Its three reportable regions are Southwest, Rocky Mountains and Northeast.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $145.8 million | $110.3 million |
| Gross profit / gross margin | $26.9 million / 18.4% | $28.3 million / 25.7% |
| Operating earnings / margin | $2.4 million / 1.6% | $5.8 million / 5.3% |
| Net earnings (loss) | $(5.0) million | $5.8 million |
| Net earnings (loss) per diluted share | $(0.24) | $0.29 |
| Operating cash flow | $4.2 million | $5.2 million |
| Capital expenditures | $29.6 million | $19.6 million |
Revenue increased 32.2%. Completion revenue rose 49.5% and production revenue rose 33.9%; intervention revenue declined 2.3%. Cost of sales was $118.9 million, or 81.6% of revenue, versus $82.0 million, or 74.3%, reflecting pre-launch hiring and training, weaker Southwest utilization and service mix. Net interest expense was $7.1 million, compared with none in the prior-year period.
Cash and cash equivalents were $110.6 million at April 30, down $53.2 million from January 31. Working capital was $186.9 million, down $36.2 million. Long-term debt, net of issue costs, was $242.3 million; it represents $250.0 million principal of 11.5% senior secured notes due 2025. The $100.0 million asset-based revolver had no borrowings outstanding; reported availability was approximately $93.9 million, with $0.8 million of letters of credit issued.
Material changes and drivers
- Revenue grew in each region: Southwest 45.7% to $58.0 million, Rocky Mountains 20.9% to $48.6 million and Northeast 29.4% to $39.2 million. Acquisitions and customer and service-line gains contributed.
- Operating results weakened despite higher revenue. Southwest reported a $4.0 million operating loss versus $2.1 million earnings; Rocky Mountains earned $2.9 million versus $1.2 million, and Northeast earned $3.5 million versus $2.5 million.
- The company incurred approximately $5.0 million of transaction and integration costs, including hiring and training about 70 personnel ahead of new service-line launches. The prior-year quarter included approximately $3.8 million of costs related principally to the former parent’s strategic alternatives review.
- March acquisitions of Tecton and Red Bone had aggregate consideration of approximately $75 million, comprising approximately $28 million cash and $47 million in shares or share-linked consideration. Their revenues included in the quarter were approximately $8.9 million. Purchase-price allocations remain preliminary; acquisition-related goodwill increased $30.4 million.
- Operating cash flow was more than offset by acquisitions and capital spending: investing cash outflow was $57.4 million, and cash declined $53.2 million. The prior-year period included $13.9 million of financing cash flows from the former parent; the current period had none.
Outlook, risks and unusual items
- Management expected approximately $100 million of capital expenditures for the fiscal year ending January 31, 2020, principally to expand service offerings and geographic reach. Spending is discretionary and may change with industry activity and company initiatives.
- Management said cash on hand, operating cash flow and revolver availability were expected to support operations, planned capital expenditures, debt service and potential acquisitions. This is management’s assessment, not a guarantee of future performance.
- Management cited slow activity among some Southwest customers, low-price conditions that led it to leave certain assets undeployed, and a sharp oil-price decline in late 2018. Oilfield demand is cyclical and affected by commodity prices, competition, customer budgets, weather, labor availability and regulation.
- The business is seasonal and weather-sensitive. The company does not record backlog because services are generally provided under master service agreements and priced for specific work.
- Future minimum operating lease payments were approximately $51.8 million, including $26.7 million for long-term real estate leases. The company also disclosed routine litigation and indemnities; management did not expect these matters to have a material adverse effect and recorded no significant amounts for the indemnities.
- A valuation allowance against most deferred tax balances prevented recognition of a federal tax benefit on the quarter’s loss; tax expense was $0.3 million, primarily state and local taxes. The filing reports no significant derivative instruments.
Important facts for investors to verify
- Whether new service-line launches and recent acquisitions improve utilization, margins and cash generation, especially in the Southwest.
- Actual capital spending versus the approximately $100 million plan, and the resulting effect on cash and revolver availability.
- Debt-service capacity under the 11.5% notes, including accrued interest and the company’s ability to maintain liquidity through industry downturns.
- Final acquisition purchase-price allocations, integration costs and the realized contribution from Tecton, Red Bone and Motley.
- Accounts-receivable collection, customer activity and exposure to oil-price, weather, labor and other operating risks.