KLX Energy Services Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Comparisons are to the three and six months ended July 31, 2021, respectively. Dollars are in millions unless noted.
Business context and results
KLX provides oilfield services and products to U.S. onshore exploration and production companies, with operations organized across the Rocky Mountains, Southwest, and Northeast/Mid-Con regions. Management attributed stronger results to increased customer activity and pricing amid an industry recovery and higher oil prices.
| Metric | Q2 2022 | Prior comparable quarter | Six months 2022 | Prior comparable six months |
|---|---|---|---|---|
| Revenue | $184.4 | $111.9 | $336.7 | $202.7 |
| Operating income (loss) | $1.4 | $(16.9) | $(10.1) | $(45.8) |
| Net loss | $(7.5) | $(25.0) | $(27.4) | $(61.8) |
| Net loss per diluted share | $(0.67) | $(2.98) | $(2.58) | $(7.39) |
Financial position, cash flow, and liquidity
- Q2 revenue grew 64.8%; six-month revenue grew 66.1%. Each region increased revenue, with Northeast/Mid-Con approximately doubling year over year in both periods.
- Cost of sales was 81.8% of Q2 revenue versus 88.7% a year earlier; for the six months it was 84.9% versus 92.6%. Management said pricing gains outpaced labor-cost increases, while inflation in materials and finished goods persisted. SG&A was 9.8% of revenue in both 2022 periods, down from 12.8% for Q2 and 14.5% for the prior six-month period.
- Cash used in operating activities was $14.6 for the six months, improved from $37.4 used in the prior comparable period. Investing activities used $7.1, while financing activities provided $25.2. Ending cash was $31.5.
- At June 30, 2022, long-term debt was $295.4 net of issuance costs, representing $300.0 principal: $250.0 of 11.5% senior secured notes due 2025 and $50.0 outstanding on the ABL. Cash was $31.5. The ABL effective rate was approximately 6.3%.
- Reported total available liquidity was $56.6, consisting of cash and $25.1 of net ABL availability after a $14.1 FCCR holdback. ABL availability was above the threshold that triggers its springing fixed-charge coverage covenant; the company said it was in compliance, although its FCCR was below 1.0 to 1.0.
- Stockholders’ deficit was $69.3 at June 30, 2022, compared with $51.4 at December 31, 2021.
Outlook, risks, and notable items
- Management forecast 2022 capital expenditures of $25–$30; $13.6 had been spent in the first six months. No revenue or earnings guidance was provided.
- Management said current forecasts, cash, ABL draws, and operating cash flow were expected to fund operations and planned capital expenditures for at least the next 12 months, but cautioned that continued improvement was not assured.
- The $100.0 ABL Facility matures in September 2023. The company was discussing refinancing with lenders and other capital sources and warned that inability to refinance, or continued uncertainty, could lead to a going-concern qualification in its 2022 audit; such a qualification would constitute an ABL event of default and could permit acceleration.
- The company sold 1.58 million shares through its ATM offering in the first half for approximately $8.4 gross proceeds, diluting existing shareholders. It also drew $20.0 under the ABL during the period.
- Inflation, labor competition and costs, oil and gas price volatility, recession risk, COVID-19 effects, and the war in Ukraine were cited as uncertainties. The company also needs to transition the ABL’s LIBOR benchmark to an alternate rate by June 30, 2023.
- Three facilities, land, and select equipment with a carrying value of $6.3 were classified as held for sale. The company reported a $5.3 gain on disposal of property, equipment, and other assets in the first-half cash flow reconciliation.
- The company had deferred $2.0 of employer FICA payments, due by December 31, 2022. A $4.6 claim related to services following an offshore well blowout remains tied to ongoing bankruptcy and insurance litigation; the full invoice amount had previously been reserved.
Important facts for investors to verify
- Progress and terms of refinancing the September 2023 ABL maturity, including available borrowing capacity and covenant status.
- Whether revenue and pricing gains can offset inflation, labor costs, and working-capital demands sufficiently to improve operating and free cash flow.
- Execution of the $25–$30 capital expenditure plan and the company’s ability to fund it without additional borrowing or equity issuance.
- ATM shares issued, remaining authorization, and the resulting dilution; also monitor the held-for-sale assets and proceeds from asset disposals.
- Developments in the $4.6 litigation claim and the timing of the deferred FICA payment.