KLX Energy Services Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended January 31, 2020 (called Fiscal 2019 in the filing). This is an annual 10-K, not a quarterly filing; it also reports fourth-quarter results. Unless noted, amounts are in millions of dollars.
Business context
KLX provides completion, intervention and production services and equipment to onshore oil and gas customers, primarily across U.S. shale basins. It reports three geographic segments: Southwest, Rocky Mountains and Northeast/Mid-Con. Fiscal 2019 included acquisitions of Tecton and Red Bone; the prior year included the Motley acquisition. KLX became an independent public company in September 2018, so some earlier-period costs reflect allocations from its former parent and may not be directly comparable.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $544.0 | $495.3 |
| Operating income (loss) | $(75.7) | $22.1 |
| Net income (loss) | $(96.4) | $14.4 |
| Basic loss per share | $(4.32) | Basic earnings per share $0.72 |
| Cash from operating activities | $58.1 | $62.0 |
| Capital expenditures | $70.8 | $84.0 |
- Revenue rose 9.8%, reflecting expanded service lines and acquisitions, but activity weakened sharply in the second half. First-half revenue was about $33.8 higher year over year in the second half comparison; management said second-half revenue fell about $33.8 versus the prior-year half.
- Cost of sales was $470.0, or 86.4% of revenue, compared with 74.8% a year earlier. The filing attributes pressure to lower utilization and fixed-cost under-absorption, as well as rollout costs for coiled tubing and flowback/testing services.
- Reported operating loss included a $47.0 non-cash goodwill impairment and $24.5 of defined costs, including cost rationalization and service-line introduction costs. Excluding those items, management reported an operating loss of $4.2, versus operating income of $52.7 excluding defined costs in FY2018.
- Fourth-quarter revenue was $98.8, cost of sales $102.4, and net loss $25.1; diluted loss per share was $1.09. Fourth-quarter results included a $1.2 goodwill impairment charge.
- Cash and cash equivalents were $123.5 at year-end, down $40.3. Working capital was $163.7, down $59.4. Operating cash flow less capital expenditures was approximately negative $12.7 before acquisition spending.
- Debt consisted of $250.0 principal amount of 11.5% senior secured notes due November 2025; carrying value, net of unamortized issue costs, was $243.0. Interest expense was $29.2. No borrowings were outstanding under the $100.0 ABL facility; reported availability was approximately $60.0, subject to borrowing-base and coverage requirements.
- Segment revenue and operating income (loss): Southwest $177.9 and $(54.3); Rocky Mountains $216.4 and $10.1; Northeast/Mid-Con $149.7 and $(31.5). Goodwill impairment charges were assigned to Southwest and Northeast/Mid-Con.
Material changes, outlook and risks
- Results deteriorated as U.S. land rig counts and operating frac spreads fell during the second half of 2019. Customers curtailed activity amid capital discipline and budget exhaustion; natural-gas activity was particularly weak in Northeast/Mid-Con.
- KLX recorded a $47.0 goodwill impairment, fully writing off goodwill in Southwest and Northeast/Mid-Con. The remaining $28.3 of goodwill related to Rocky Mountains; its estimated fair value exceeded carrying value by 10.9% at December 31, 2019. Further underperformance could prompt additional impairment.
- Management estimated FY2020 capital expenditures (year ending January 31, 2021) of $25–$30, based on then-current industry conditions. It gave no clear revenue or earnings guidance and said the effects of COVID-19 and the March 2020 oil-price collapse could not be estimated. Management cited oil prices as low as approximately $21 per barrel, expected significant service-demand pressure, and described cost reductions, workforce rightsizing and reduced capital spending.
- Liquidity depends on operating cash flow and continued access to the ABL facility. If the trailing fixed-charge coverage ratio falls below 1:1, ABL availability is reduced by the greater of $10.0 or 15% of the borrowing base. The company also faces substantial fixed interest and lease commitments.
- Other notable exposures include commodity-price cyclicality, customer spending and credit risk, competition and pricing pressure, operating and environmental hazards, regulation of oilfield activity, skilled-labor availability, supplier disruption, and acquisition integration. Five largest customers represented about 29% of FY2019 revenue; no single customer exceeded 10%.
- The filing discloses a $2.6 credit-card theft recorded in cost of sales; KLX pursued recovery through insurance and litigation. Management stated ordinary-course legal matters were not expected to have a material adverse effect. It also reported effective disclosure controls and internal control over financial reporting; the auditor’s assessment excluded the not-yet-integrated portion of Tecton, representing approximately 2% of assets and 4% of revenue.
Most important facts for investors to verify
- How post-fiscal-year 2019 oil prices, COVID-19 disruption and customer budget cuts affected actual activity, pricing, revenue and cash flow.
- Whether the $25–$30 capital-spending estimate and approximately $60.0 of ABL availability remain achievable under current borrowing-base and coverage tests.
- Cash interest burden and refinancing or covenant flexibility for the 11.5% notes and ABL facility.
- Whether utilization and margins recover across segments, particularly in Southwest and Northeast/Mid-Con, and whether remaining goodwill or other assets face further impairment.
- Collection quality and credit-loss exposure, including the increase in the doubtful-account allowance to $12.9 from $3.1, and the outcome of recovery efforts for the $2.6 theft.
- Potential share dilution from acquisition consideration and equity awards, and the effects of the company’s stated decision not to currently intend to pay dividends.