KLX Energy Services Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022. KLX provides oilfield services, equipment rentals and products to onshore U.S. oil and gas operators across three geographic segments.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $239.6 million | $152.3 million |
| Operating income (loss) | $18.9 million | $(11.5) million |
| Net income (loss) | $9.4 million | $(19.9) million |
| Diluted earnings (loss) per share | $0.65 | $(1.98) |
| Cash flow from operations | $(8.6) million | $(6.2) million |
| Capital expenditures | $10.3 million | $5.8 million |
- Revenue increased 57.3%. Management attributed approximately 63% of the increase to higher weighted-average pricing and 37% to higher volume.
- Cost of sales was 75.5% of revenue, versus 88.6% a year earlier. Gross margin was approximately 24.5%, compared with 11.4%. Operating margin was approximately 7.9%, versus negative 7.5%; net margin was approximately 3.9%, versus negative 13.1%.
- Revenue grew across all segments: Rocky Mountains $67.9 million (up 56.8%), Southwest $73.4 million (up 41.4%), and Northeast/Mid-Con $98.3 million (up 72.2%). Completion was the largest service line at $130.0 million.
- Cash and cash equivalents were $39.6 million at quarter-end, down $17.8 million from December 31, 2022. Working-capital movements included a $22.0 million cash use from accounts receivable; management cited slower customer payments, early vendor payments ahead of a systems project, and an extra payroll.
- Current assets were $277.2 million and current liabilities $160.7 million. KLX reported $44.4 million available under its ABL borrowing base, for stated total available liquidity of $84.0 million.
- Debt was $287.3 million in principal ($283.6 million net of unamortized issuance costs): $237.3 million of 11.5% senior secured notes due 2025 and $50.0 million drawn on the $100.0 million ABL facility, which matures in September 2024. The ABL effective rate was approximately 7.7% at quarter-end.
Material changes and unusual items
- On March 8, 2023, KLX acquired Greene’s Energy Group in an all-stock transaction, issuing approximately 2.4 million shares; former Greene’s shareholders held approximately 14.7% of fully diluted shares after closing. Greene’s contributed $4.7 million of revenue and $0.6 million of operating income from acquisition through quarter-end.
- The acquisition generated a $3.2 million bargain purchase gain. Purchase-price allocations are preliminary and expected to be finalized by Q1 2024. Unaudited pro forma revenue, assuming the acquisition occurred January 1, 2022, was $251.9 million for Q1 2023 and $167.4 million for Q1 2022.
- SG&A rose to $26.2 million from $15.0 million, reflecting incentive bonuses and Greene’s-related professional and other costs. Corporate and other operating loss widened to $14.4 million from $9.5 million, in part due to non-recurring acquisition costs.
- Stockholders’ equity increased to $27.5 million from a $15.8 million deficit at year-end, including shares issued for Greene’s and quarterly net income.
Outlook, risks and contingencies
- Management expects 2023 capital expenditures of $60–$70 million, including $45–$50 million for maintenance. The company says it expects cash, ABL availability and operating cash flows to fund operations and planned capital expenditures for at least the next 12 months, but cautions that market and operating conditions could change.
- Management described demand as recovering but noted that U.S. activity growth moderated in Q1; WTI prices declined 9.6% from January 1 to March 31, 2023, and the U.S. rig count fell 3.1% from year-end to 755. Pricing gains had helped offset inflation and higher labor costs; labor cost per employee rose 15.7% year over year.
- Key risks include oil and gas price and activity volatility, inflation and labor availability, customer payment delays, substantial leverage and refinancing needs, and the ability to maintain service pricing. Management may explore refinancing, recapitalization or debt-for-equity alternatives; equity issuance or exchanges could dilute shareholders.
- The ABL springing fixed-charge coverage covenant applies if availability falls below the specified threshold. Availability remained above the threshold during the quarter, and KLX reported compliance. The notes bear 11.5% interest and mature in 2025.
- Environmental and ordinary-course legal matters were not identified as likely to have a material adverse effect by management. A $4.6 million claim related to the Magellan bankruptcy remains in litigation and had been fully reserved. Management reported disclosure controls effective as of March 31, 2023.
Important facts for investors to verify
- Whether the revenue and margin improvement persists as commodity prices, rig activity, pricing and labor costs change.
- Collections and working-capital trends, given the operating cash outflow and increased receivables.
- Greene’s final purchase-price allocation, integration progress and expected contribution to results.
- Liquidity and refinancing plans ahead of the ABL’s September 2024 maturity and the notes’ 2025 maturity, including interest burden and covenant headroom.
- Whether planned capital spending stays within the $60–$70 million range and produces the expected returns.