KLX Energy Services Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2019. The company provides completion, intervention and production services to U.S. onshore oil and gas producers and reports three geographic segments. Amounts below are in millions, except per-share data and percentages.
Financial performance
| Metric | Three months ended July 31, 2019 | Six months ended July 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $164.9; +39.9% | $310.7; +36.2% | $117.9 and $228.2 |
| Cost of sales / revenue | $129.4 / 78.5% | $248.3 / 79.9% | 72.7% and 73.5% |
| Operating earnings / margin | $11.0 / 6.7% | $13.4 / 4.3% | $13.7 / 11.6%; $19.5 / 8.5% |
| Interest expense, net | $7.4 | $14.5 | No interest expense reported |
| Net earnings (loss) | $3.5 | $(1.5) | $13.6; $19.4 |
| Basic and diluted EPS | $0.16 | $(0.07) | $0.68; $0.97 |
| Operating cash flow | $11.9 for six months | $29.7 | |
| Capital expenditures | $56.8 for six months | $36.2 |
Cash was $92.4 at July 31, down $71.4 from January 31. Working capital was $187.3. The company held $250.0 principal amount of 11.5% senior secured notes due 2025; carrying value, net of issuance costs, was $242.6. No borrowings were outstanding under the $100.0 ABL facility; reported availability was approximately $99.2, subject to the borrowing base. Cash less note principal implies approximate net debt of $157.6. Operating cash flow less capital expenditures was negative $44.9 for the six months, before acquisition spending.
Material changes and operating drivers
- Revenue grew across all segments, with acquisitions contributing to growth: Motley was acquired in November 2018, and Tecton and Red Bone in March 2019. The 2018 comparison also reflects pre-spin-off reporting and allocated former-parent expenses, so periods are not fully comparable.
- Despite higher revenue, operating earnings fell 19.7% in Q2 and 31.3% for the six months. Cost of sales rose as a share of revenue, with reduced activity, launch costs for new services and equipment, and low wireline utilization weighing on margins.
- Q2 segment revenue was $53.3 Southwest, $63.5 Rocky Mountains and $48.1 Northeast/Mid-Con. Southwest recorded an operating loss of $1.6; Rocky Mountains operating earnings were $8.7 and Northeast/Mid-Con $3.9.
- Severe flooding and tornadoes curtailed Mid-Con activity for about six weeks in May and June. In the Southwest, the company chose not to deploy wireline assets at prevailing prices; pipeline constraints and customer spending discipline also pressured activity.
- Six-month operating cash flow declined year over year, affected by a $26.5 increase in receivables and lower earnings. Investing cash outflow was $84.1, including $56.8 of capital expenditures and $27.6 for acquisitions.
Outlook, risks and unusual items
- Management expected approximately $100.0 of capital expenditures for the fiscal year ending January 31, 2020, to support service-line expansion, including coiled tubing, filtration, testing and flowback. Spending remains discretionary and dependent on activity and company initiatives.
- Management said cash on hand, operating cash flow and the undrawn ABL facility were expected to fund operations, planned capital expenditures, debt service and potential acquisitions. This is an expectation, not a guarantee.
- Management cited customer capital discipline, oilfield-service cyclicality, pricing competition, severe weather, natural-gas takeaway constraints, fuel prices, labor availability and acquisition integration as risks. Demand is seasonal; the company does not record backlog because work is generally arranged under master service agreements and day rates.
- Future minimum operating lease payments were approximately $52.0, including $22.9 for long-term real estate leases. Management said ordinary-course litigation and indemnity exposures were not expected to be material; no significant amounts were accrued for indemnities and guarantees.
- A valuation allowance against most deferred tax balances prevented recognition of a federal tax benefit on the six-month loss. Purchase-price allocations for Tecton and Red Bone remained preliminary.
- The company reported effective disclosure controls as of July 31, 2019, with no material second-quarter change in internal control over financial reporting.
Investor facts to verify
- Whether margins and earnings recover as weather disruptions subside and new service-line rollout costs and low wireline utilization ease.
- Receivables growth, collections and cash conversion, given the $26.5 six-month operating cash-flow use from receivables.
- Execution of the approximately $100.0 capital-spending plan and resulting liquidity, alongside the 11.5% notes and ABL borrowing-base availability.
- Final purchase-price allocations and realized performance from Motley, Tecton and Red Bone.
- Customer activity, pricing, pipeline capacity and regional weather conditions, particularly in the Southwest and Northeast/Mid-Con.