KLX Energy Services Holdings, Inc. current report, 13 September 2018

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Business Context and Reporting Period

KLX Energy Services Holdings, Inc. filed this Form 8-K on September 19, 2018, reporting events beginning September 13, 2018. The filing documents the completion of KLX Inc.’s spin-off of its energy services business.

  • On September 14, 2018, KLX transferred its energy services business to KLX Energy Services and distributed approximately 20.1 million shares to KLX stockholders of record as of September 3, 2018.
  • Eligible KLX stockholders received 0.4 shares of KLX Energy Services for each KLX share held.
  • KLX Energy Services began trading on Nasdaq Global Select Market on September 17, 2018, under the ticker KLXE.
  • The filing contains no operating-period financial statements or clearly reported revenue, profit, cash flow, or margin data.

Financial Position, Debt, and Liquidity

  • The company’s $100 million asset-backed revolving credit facility became available for borrowing on September 14, 2018.
  • KLX Energy Services LLC and KLX RE Holdings LLC provided joint and several guarantees of the facility.
  • The filing does not provide a clear amount for borrowings, unused capacity, cash balances, liquidity, interest rates, or outstanding debt as of the filing date.
  • Management indicated that executive compensation arrangements were structured to preserve cash for day-to-day operations and to support growth and acquisition activity.

Material Changes and Corporate Actions

  • The spin-off established KLX Energy Services as an independent public company and resulted in a change in control from KLX Inc. to the distributed stockholders.
  • The company entered into distribution, employee matters, transition services, and intellectual property agreements with KLX governing the post-spin-off relationship.
  • The company adopted an amended and restated certificate of incorporation and amended and restated bylaws.
  • A new eight-member classified board and board committees were established.
  • Amin J. Khoury was appointed Chairman, Chief Executive Officer, and President; Thomas P. McCaffrey was appointed Senior Vice President and Chief Financial Officer; and Gary J. Roberts was appointed Vice President and General Manager.

Compensation, Equity Plans, and Other Unusual Items

  • Restricted stock was approved for Messrs. Khoury, McCaffrey, and Roberts in amounts equal to 5%, 3%, and 1%, respectively, of the company’s fully diluted common stock after giving effect to the grants.
  • Khoury and McCaffrey agreed to forego cash remuneration for the first four years following the spin-off.
  • Roberts’ employment agreement provides for base salary of $323,138 per year, an annual target bonus of up to 75% of base salary, and specified severance provisions upon certain termination events.
  • The company adopted a long-term incentive plan authorizing up to 3,225,000 shares, a non-employee directors plan covering up to 300,000 shares, and an employee stock purchase plan covering up to 200,000 shares.
  • The employee stock purchase plan generally permits purchases at 85% of fair market value, subject to plan limits.
  • The company also adopted deferred compensation, executive medical reimbursement, and executive retiree medical and dental plans.
  • Khoury and McCaffrey received demand and piggyback registration rights for their company shares, subject to the terms of the applicable agreements.

Guidance, Outlook, Risks, and Contingencies

  • The filing provides no quantitative financial guidance or earnings outlook.
  • Management’s stated strategic priorities include preserving cash for operations and pursuing growth and acquisitions.
  • KLX Energy Services remained subject to ongoing arrangements with KLX, including transition services and employee-related matters.
  • KLX and the company’s directors and officers were expected to retain overlapping positions until Boeing’s pending acquisition of KLX, which management expected to close in the fourth quarter of 2018.
  • Key risks include dependence on the newly established credit facility, execution of the separation and transition arrangements, potential dilution from equity plans and restricted stock, executive severance obligations, and the effects of related-party arrangements with KLX.

Investor Verification Checklist

  • Verify the borrowing base, outstanding borrowings, availability, covenants, and collateral requirements under the $100 million credit facility.
  • Review the company’s first post-spin-off balance sheet and results of operations, as this Form 8-K does not provide those metrics.
  • Assess the terms, vesting conditions, and potential dilution from the restricted stock grants and newly adopted equity plans.
  • Review the distribution, transition services, employee matters, and intellectual property agreements with KLX for continuing costs and obligations.
  • Evaluate executive compensation, severance, deferred compensation, and change-in-control provisions.
  • Confirm the status and timing of Boeing’s proposed acquisition of KLX and any effect on KLX Energy Services’ related-party relationships.