KLX Energy Services Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended October 31, 2019. Amounts below are in millions of dollars except per-share data. KLX provides completion, intervention and production services to U.S. onshore oil and gas regions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $134.5 | $123.2 | $445.2 | $351.4 |
| Operating income (loss) | $(63.1) | $(9.9) | $(49.7) | $9.6 |
| Net income (loss) | $(69.8) | $(9.9) | $(71.3) | $9.5 |
| Diluted EPS | $(3.10) | $(0.49) | $(3.24) | $0.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $53.2 | $51.6 |
- Revenue increased 9.2% in Q3 and 26.7% year to date. Acquisitions contributed to growth; Q3 service-line growth in completion and intervention was partly offset by a decline in production services.
- Q3 cost of sales was 88.7% of revenue, versus 73.2% a year earlier. Excluding $2.1 of specified costs, it was 87.1%. The company attributed the increase to weaker utilization, startup and rollout costs, and the downturn in activity.
- Q3 operating loss included a $45.8 goodwill impairment and $13.3 of specified costs, including severance and higher bad-debt reserves. Excluding those items, management reported a $4.0 operating loss, compared with $13.1 operating income in Q3 2018.
- Cash and equivalents were $121.1 at October 31, down from $163.8 at January 31. Working capital was $176.6, down $46.5 over that period.
- Nine-month investing cash use was $94.5, including $67.4 of capital expenditures and $27.6 for acquisitions. Financing cash use was $1.4. Cash declined $42.7 overall.
- Debt comprised $250.0 principal of 11.5% senior secured notes due 2025; carrying value, net of issuance costs, was $242.8. No borrowings were outstanding on the $100.0 ABL facility; reported availability was approximately $72.2. The company said it met the facility’s covenants.
Changes, outlook and risks
- Industry conditions deteriorated sharply in Q3 as U.S. land rig counts and active frac spreads declined. Management reported sequential Q3 revenue declines of approximately 18% overall; customer activity and pricing pressure varied by basin.
- Goodwill impairment eliminated goodwill in Southwest and Northeast/Mid-Con; $24.0 remained in Rocky Mountains. Management cautioned that lower-than-projected results or reduced long-term forecasts could trigger further impairment. Long-lived assets were not impaired in the quarter.
- The company reduced staffing by approximately 17% from July 31 levels, warm-stacked most Permian wireline assets and cut costs. It expected benefits from realignment early in Q4, but said coiled-tubing startup costs and winter seasonality would weigh on Q4 earnings.
- Management identified five new large-diameter coiled-tubing spreads and their rollout across regions as a strategic priority for 2020, alongside cost control, free-cash-flow generation and balance-sheet strengthening. It forecast approximately $75.0 of capital expenditures for the fiscal year ending January 31, 2020.
- Acquisitions of Tecton and Red Bone were completed in March 2019; Motley was acquired in November 2018. Tecton and Red Bone purchase-price allocations were still preliminary. Comparisons are also affected by the September 2018 spin-off and prior-period parent-company allocations.
- Other exposures include customer bankruptcies and receivable collectability, cyclical oilfield demand, competition and pricing, weather, fuel costs, and lease commitments of $70.6. The filing reports no significant litigation exposure expected by management and no significant derivative positions.
Investor verification points
- Check subsequent results against management’s Q4 cost-realignment expectations, coiled-tubing rollout plans and $75.0 full-year capex estimate.
- Review receivable quality and the impact of customer bankruptcies: the allowance for doubtful accounts was $13.8 at October 31, versus $3.1 at January 31.
- Track cash, operating cash flow, capital spending and debt service, including interest on the 11.5% notes and ABL borrowing availability.
- Verify final Tecton and Red Bone acquisition accounting and assess whether further goodwill or long-lived-asset impairment is recorded.
- Consider share repurchases: the board authorized up to $50.0; 112,341 shares were repurchased under the program during the quarter, while total purchases including employee tax-withholding shares were 208,877.