KLX Energy Services Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended October 31, 2018; amounts in millions except per-share data. KLX Energy Services provides completion, intervention and production services to U.S. onshore oil and gas regions. It became an independent public company following its September 14, 2018 spin-off from KLX Inc. Prior-period results include allocated parent-company costs and may not be directly comparable with standalone results.
Financial performance
| Metric | Three months 2018 | Three months 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $123.2 | $89.2 | $351.4 | $226.2 |
| Operating earnings (loss) | $(9.9) | $(1.8) | $9.6 | $(20.0) |
| Net earnings (loss) | $(9.9) | $(1.8) | $9.5 | $(20.1) |
| Basic and diluted EPS | $(0.49) | $(0.09) | $0.47 | $(1.00) |
- Revenue increased 38.1% in Q3 and 55.3% year to date. All three regions grew: Q3 Southwest 22.4%, Rocky Mountains 34.4% and Northeast 66.2%; year-to-date growth was 53.8%, 50.2% and 65.3%, respectively.
- Cost of sales was 73.2% of revenue in Q3 versus 81.6% a year earlier, and 73.4% year to date versus 85.1%. Corresponding gross margins were approximately 26.8% and 18.4% for Q3, and 26.6% and 14.9% year to date.
- Reported results include $23.0 of Q3 and $28.7 of year-to-date costs associated with the Boeing/KLX transaction, spin-off, financing and Motley acquisition. Excluding these costs, management reported operating earnings of $13.1 for Q3 and $38.3 year to date. These are management’s adjusted figures, not reported GAAP results.
- Q3 SG&A was $42.3, including the above costs; excluding them it was $19.3. Year-to-date SG&A was $82.0, or $53.3 excluding the specified costs. Q3 included $10.7 of noncash share-based compensation from accelerated vesting.
- Operating cash flow was $51.6 for the first nine months, versus cash used of $13.2 in 2017. Capital expenditures were $55.0 versus $33.7; operating cash flow less capital expenditures was approximately $(3.4), before financing and other items.
Financial position, debt and liquidity
- At October 31, cash and cash equivalents were $313.2; working capital was $354.7. Cash was $0 at January 31, 2018, when KLX centrally managed cash.
- Long-term debt was $243.0 net of issuance costs, representing $250.0 principal of 11.5% senior secured notes due 2025. The $100.0 asset-based revolving facility, maturing in September 2023, had no borrowings; reported availability was approximately $69.0 and letters of credit were $0.8.
- Cash flows from financing included $250.0 of note proceeds, $8.3 of debt issuance costs and $74.9 of aggregate pre-spin-off parent funding and contribution. The filing says cash on hand after the subsequent Motley purchase would be approximately $174.0.
- Property and equipment, net, was $206.3, up from $179.5 at January 31. Future minimum operating lease payments were $50.7, including $23.8 for real estate.
Changes, outlook and risks
- On November 5, 2018, the company acquired Motley Services for $139.2 cash, subject to adjustments, plus $9.0 in company shares payable to certain Motley employees. Purchase-price allocation was not finalized. Management’s approximately $174.0 post-acquisition cash estimate reflects this transaction.
- Management expected approximately $90.0 of capital expenditures for the fiscal year ending January 31, 2019, including growth, maintenance and coiled-tubing investment related to Motley. It expected standalone public-company expenses to run approximately $8.0 annually above historical parent allocations and anticipated another $3.0–$5.0 of transition costs within 6–12 months after the spin-off.
- Management attributed improved demand and operating leverage to recovering U.S. onshore activity and sales of higher-margin services. It also noted that 17 consecutive days of Texas rain, flooding and road closures hurt Southwest revenue.
- Key risks include oilfield-service cyclicality, commodity and customer activity changes, competition, severe weather, fuel-price volatility and the ability to obtain financing or successfully integrate acquisitions. The business is seasonal; holiday pauses, winter weather and spring-thaw transport restrictions may affect activity. Management stated that it generally does not hedge fuel exposure and may not always pass fuel-cost increases to customers.
- Management considered routine litigation unlikely to have a material adverse effect. It could not estimate maximum exposure for certain indemnities and guarantees, but did not expect material liability. The filing reported effective disclosure controls as of October 31, 2018.
Important facts for investors to verify
- How reported profitability compares with the company’s adjusted results, and how much of the $23.0 Q3 and $28.7 year-to-date costs are nonrecurring.
- Motley’s final purchase-price allocation, actual funding and contribution to revenue, cash flow and margins.
- Whether cash generation and ABL availability support planned capital expenditures and debt service, particularly given the notes’ 11.5% coupon.
- Standalone corporate-cost levels versus management’s estimates, and the sustainability of revenue growth and margin improvement across regions.
- Effects of weather, seasonality, fuel costs and changing oil and gas activity on operations and liquidity.