KLX Energy Services Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2018. The unaudited statements present KLX Energy Services as a carved-out business of KLX Inc.; historical results include allocated parent-company costs and may not represent future standalone expenses. Amounts below are in millions unless noted.
Business context and financial performance
KLX Energy Services provides completion, intervention and production services and products to U.S. onshore oil and gas regions. It reports Southwest, Rocky Mountains and Northeast segments. The filing describes a planned spin-off from KLX, with distribution scheduled for September 14, 2018.
| Metric | Three months ended July 31, 2018 | Prior-year quarter | Six months ended July 31, 2018 | Prior-year half-year |
|---|---|---|---|---|
| Revenue | $117.9 | $73.5 | $228.2 | $137.0 |
| Operating earnings (loss) | $13.7 | $(7.8) | $19.5 | $(18.2) |
| Operating margin | 11.6% | (10.6%) | 8.5% | (13.3%) |
| Net earnings (loss) | $13.6 | $(7.9) | $19.4 | $(18.3) |
| Cost of sales as % of revenue | 72.7% | 86.7% | 73.5% | 87.3% |
| SG&A | $17.9 | $17.2 | $39.7 | $34.8 |
- Quarterly revenue rose 60.4%; first-half revenue rose 66.6%. Each of the three geographic segments grew, with quarterly growth ranging from 49.7% in the Northeast to 64.8% in the Rocky Mountains.
- Management attributed growth to stronger industry activity, demand for completion and intervention services, higher-margin proprietary offerings, service quality and operating leverage. First-half revenue increased across all service lines; completion was the fastest-growing.
- Operating margin improved substantially year over year as revenue growth outpaced SG&A growth and cost of sales declined as a share of revenue. R&D expense was $0.6 for the quarter and $1.3 for the half-year.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $29.7, versus cash used of $13.8 in the prior-year period. Capital expenditures were $35.5, versus $21.1; net transfers from KLX were $5.8, versus $34.9. Reported cash and cash equivalents were zero at both July 31 and January 31.
- At July 31, current assets were $99.4 and current liabilities $49.5, for working capital of $49.9; total assets were $305.5. Accounts receivable was $84.7, up from $73.9 at January 31.
- The presented balance sheet reports no debt, but KLX’s debt and related interest were not attributed to the carve-out. The company entered into a $100 asset-based revolving credit facility on August 10, available after the spin-off and secured primarily by receivables and inventory. Management expected at least $50 of availability at separation and expected the facility to be undrawn then.
- KLX committed to contribute $50 at separation and provide support, as needed, through the spin-off. Management said expected operating cash flow, the contribution, the facility and discretionary-spending controls would support obligations for the next 12 months. The filing also says the company used approximately $0.1 of cash from operations less capital expenditures, excluding spin-off costs; this does not match the simple difference between reported operating cash flow and capital expenditures, and the filing text does not clearly reconcile it.
Outlook, material changes and risks
- Management expected approximately $70 of capital expenditures for the fiscal year ending January 31, 2019, principally for growth and maintenance. Spending could vary with activity and other factors.
- Estimated nonrecurring standalone transition costs were less than $10, primarily expected within six months after distribution. Recurring standalone public-company costs were estimated at $5–$7 annually above expenses historically allocated by KLX.
- The spin-off was approved by KLX’s board on August 24, 2018, with a September 3 record date and September 14 expected distribution date. KLX stockholders were expected to receive 0.4 KLX Energy Services shares per KLX share. Completion of the proposed Boeing-KLX merger was not a condition to the distribution; if the merger agreement were terminated before distribution, KLX could decide not to proceed with the spin-off.
- Key exposures include the cyclical energy-services market, changes in oil and natural gas prices and customer activity, competition, severe weather, fuel-cost volatility, skilled-labor availability, operational hazards and financing needs. The company generally did not hedge fuel-price risk and might not always pass cost increases to customers.
- Future minimum operating-lease payments were $36.4, including $21.8 for long-term real estate leases. Management considered pending routine litigation and indemnity exposures not likely to have a material adverse effect, but could not estimate maximum potential indemnity payments. The distribution agreement also provides for possible indemnification of KLX for certain recognized gain on the distribution.
- Management reported effective disclosure controls as of July 31, 2018, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the spin-off occurred on the expected timetable, and the final cash contribution and any settlement of cash flows with KLX.
- Actual ABL borrowing-base availability, covenant terms and liquidity after separation; facility commitment size is not the same as available borrowing capacity.
- Standalone operating costs versus the filing’s estimates, including the effect of transition services and allocated parent expenses.
- Whether planned capital spending and working-capital needs are supported by operating cash flow, particularly as receivables grow.
- How revenue growth, margins and cash generation respond to changes in oilfield activity, pricing, fuel costs and weather.