KLX Energy Services Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended April 30, 2020 (the company’s fiscal first quarter). KLX provides completion, intervention and production services to U.S. onshore oil and gas operators. Amounts below are in millions, except per-share data.
Financial performance and liquidity
| Metric | Q1 2020 | Prior-year quarter |
|---|---|---|
| Revenue | $83.0 | $145.8 |
| Cost of sales | $92.2 (111.1% of revenue) | $118.9 (81.6%) |
| Operating loss | $(235.6), including $208.7 impairment | Operating earnings of $2.4 GAAP |
| Net loss | $(243.1) | $(5.0) |
| Loss per share, basic and diluted | $(10.52) | $(0.24) |
| Cash from operating activities | $7.0 | $4.2 |
| Capital expenditures | $4.8 | $29.6 |
- Revenue declined 43.1% year over year. Completion, intervention and production revenue fell approximately 42.2%, 35.4% and 53.0%, respectively. Revenue declined across all three regions.
- Excluding $9.7 of “Costs as Defined,” cost of sales was $82.5, or 99.4% of revenue. Management attributed the higher cost ratio primarily to negative operating leverage as activity fell. SG&A was $17.4, including $4.3 of Costs as Defined.
- Cash was $125.6 at April 30, versus $123.5 at January 31; working capital was $141.0. Operating cash flow benefited in part from a $25.0 reduction in accounts receivable.
- Long-term debt was $243.2 net of issuance costs, representing $250.0 principal of 11.5% senior secured notes due 2025. The $100.0 ABL facility had no borrowings; availability was $42.0, down from $60.0 at January 31, and letters of credit were $2.2.
- Management estimated approximately $8.0 of capital expenditures for the fiscal year ending January 31, 2021, subject to industry conditions. It believed cash, operating cash flow and ABL availability would fund operations and planned capital expenditures for at least 12 months.
Material changes and unusual items
- KLX recorded a $208.7 non-cash impairment charge: $28.3 for all remaining goodwill and $180.4 for long-lived assets ($141.2 property and equipment; $39.2 identifiable intangibles). The charge reflected weaker current and expected demand amid COVID-19 and the oil-market dispute involving Saudi Arabia and Russia. Remaining goodwill was zero; property and equipment was $158.1 and identifiable intangibles $5.5.
- Total assets declined to $378.2 from $623.4 at January 31, primarily reflecting the impairment. Stockholders’ equity fell to $68.1 from $312.2.
- Management reported a $14.0 total of Costs as Defined, including $9.7 in cost of sales and $4.3 in SG&A. The filing describes these as primarily business-rationalization and other costs, and pending merger costs. Excluding these costs and impairment, MD&A reports an operating loss of $12.9; the prior-year comparable figure on that basis is operating earnings of $7.4.
- On May 3, 2020, after quarter-end, KLX agreed to combine with Quintana Energy Services Inc. in an all-stock merger. QES holders would receive 0.4844 KLX shares per share; anticipated ownership of the combined company was approximately 59% KLX holders and 41% QES holders. Closing remained subject to approvals and other conditions.
Outlook, risks and contingencies
- Management cited sharply lower oilfield activity, COVID-19 disruption, oil-price volatility and production uncertainty as material pressures. It said it was reducing capital spending and costs and rightsizing its workforce; no revenue or earnings guidance was provided.
- Management warned that prolonged weak commodity prices, reduced customer activity, E&P customer distress or bankruptcies, and lower receivables could further impair results, liquidity and ABL borrowing availability. Future impairment charges are possible if operating results or projections weaken further.
- The $42.0 ABL availability depends on a borrowing base that includes eligible receivables and inventory. The facility has no maintenance financial covenants while specified availability conditions are met; availability may be reduced when the fixed-charge coverage ratio condition is not met.
- Contractual obligations totaled $503.0, including $174.5 of estimated future interest and fees on outstanding debt and $75.0 of operating lease payments. Management stated ordinary-course litigation was not expected to have a material adverse effect. A separate $2.6 credit-card theft claim from fiscal 2019 remained subject to litigation and potential insurance recovery.
- The QES merger carried execution, approval, integration and market-price risks. The exchange ratio was fixed; specified termination circumstances could trigger a $3.0 fee and expense reimbursement of up to $1.5.
- Management concluded disclosure controls and procedures were effective as of April 30, 2020; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer activity, revenue and cash generation stabilized after the steep year-over-year decline, and whether management’s cash runway assumptions remain valid.
- Current borrowing-base availability under the ABL facility, including the effect of receivables, inventory and any fixed-charge coverage restrictions.
- Whether further asset impairments or restructuring and merger-related costs arise; impairment valuations depend on significant estimates and projections.
- Progress, approvals, costs and closing conditions for the QES merger, including the fixed exchange ratio and anticipated ownership split.
- Ability to service the 11.5% notes and meet lease and other contractual obligations; also monitor the market value of the notes, reported at $92.8 versus $202.5 at January 31.