KLX Energy Services Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; nine-month results compared with the nine months ended October 31, 2021. Dollar amounts are in millions unless noted.
Business context
KLX provides oilfield services and products to onshore oil and gas operators across U.S. basins. Its three geographic segments are Rocky Mountains, Southwest, and Northeast/Mid-Con.
Financial performance
| Metric | Q3 2022 | Prior-year quarter | Nine months 2022 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $221.6 | $139.0 | $558.3 | $341.7 |
| Operating income (loss) | $20.4 | $(10.4) | $10.3 | $(56.2) |
| Net income (loss) | $11.1 | $(18.8) | $(16.3) | $(80.6) |
| Net income (loss) per share | $0.96 | $(2.19) | $(1.49) | $(9.60) |
- Q3 revenue rose 59.4%; nine-month revenue rose 63.4%. Activity and pricing improved across all regions and service lines.
- Cost of sales was 76.2% of revenue in Q3 versus 86.8% a year earlier; for the nine months, 81.4% versus 90.3%. Derived gross margins were 23.8% and 18.6%, respectively, compared with 13.2% and 9.7% in the prior periods.
- Q3 operating margin was approximately 9.2% versus negative 7.5%; nine-month operating margin was approximately 1.8% versus negative 16.4%. SG&A was $18.0 in Q3 and $51.0 for the nine months, declining as a share of revenue.
- Net interest expense was $9.0 in Q3 and $26.0 for the nine months. The company recorded a year-to-date net loss despite positive Q3 earnings.
- Operating cash flow was $3.9 for the nine months, versus cash used of $43.2 in the prior period. Investing cash flow was $(14.3), including $26.1 of capital expenditures and $11.8 of asset-sale proceeds; financing cash flow was $23.8. Cash increased $13.4 to $41.4.
- At September 30, cash was $41.4 and ABL availability was $45.0, for reported available liquidity of $86.4. Current assets were $225.0 and current liabilities $156.5.
- Debt principal was $300.0: $250.0 of 11.5% senior secured notes due 2025 and $50.0 outstanding under the ABL. Debt, net of issuance costs, was $295.6. The notes’ reported fair value was $177.5. Total stockholders’ deficit was $55.9.
Changes, outlook and risks
- All three regions improved substantially. Q3 revenue growth was strongest in Rocky Mountains (82.2%); Northeast/Mid-Con had the largest nine-month growth (78.4%). Completion services accounted for about half of revenue.
- Management attributed stronger margins and results to higher activity and pricing. It also cited inflation in materials, rising labor costs and competition for skilled workers; price increases partially offset cost pressure.
- Management expected full-year 2022 capital expenditures of $30–$35. It stated that cash, ABL draws and forecast operating cash flows were expected to fund operations and planned capital expenditures for at least 12 months, while cautioning that conditions and liquidity could change.
- The September ABL amendment extended maturity to September 15, 2024, raised the applicable margin by 0.50%, replaced LIBOR with Term SOFR, and revised borrowing and covenant provisions. The company reported compliance and availability above the springing covenant threshold at quarter-end. The amendment also limits excess cash after a borrowing and use of proceeds to $35.0.
- Key risks include commodity-price and activity volatility, inflation and recession risk, customer collections, high leverage and refinancing needs, interest rates, capital-market access, labor and supply constraints, operational hazards, and regulatory or environmental liabilities. A $4.6 customer invoice claim tied to the Magellan bankruptcy was fully reserved; the bankruptcy proceedings remain ongoing.
- After quarter-end, the company exchanged $4.0 principal amount of notes for 235,281 shares; approximately $246.0 principal remained. The filing also reported appointment of CEO Christopher J. Baker to the board on November 8, 2022.
Important facts for investors to verify
- Whether higher activity and pricing continue to offset labor, materials, and other inflationary costs.
- Whether operating cash generation can support working-capital needs, planned capital spending, and debt service as receivables rise.
- ABL borrowing-base availability, covenant headroom, amendment restrictions, and refinancing options for the 2024 facility and 2025 notes.
- Progress and dilution implications of ATM equity issuance and further debt-for-equity exchanges.
- Actual full-year capital expenditures and liquidity relative to management’s stated outlook.