Business context and reporting period
KLX Energy Services Holdings, Inc. provides oilfield services and equipment to onshore oil and gas producers across U.S. basins. This Form 10-Q covers the three and nine months ended October 31, 2021. Amounts are in U.S. dollars, in millions except per-share data. The company changed its fiscal year-end to December 31, making 2021 an 11-month fiscal year. Comparisons are affected by the July 2020 QES acquisition: 2021 includes QES for the full periods, whereas 2020 includes it only after acquisition.
Financial performance and position
| Metric | Three months ended October 31 | Nine months ended October 31 |
|---|---|---|
| Revenue | $139.0 vs. $70.9, up 96.1% | $341.7 vs. $190.1, up 79.7% |
| Cost of sales | $120.7; 86.8% of revenue, vs. $65.6; 92.5% | $308.5; 90.3% of revenue, vs. $180.5; 95.0% |
| Operating loss | $10.4 vs. $30.4 | $56.2 vs. $278.8 |
| Net loss | $18.8 vs. $38.3 | $80.6 vs. $301.8 |
| Basic and diluted loss per share | $2.19 vs. $4.56 | $9.60 vs. $50.26 |
- Gross margin, calculated as revenue less cost of sales, was 13.2% for the quarter and 9.7% for the nine months, compared with 7.5% and 5.0%, respectively, in 2020. Management attributed improvement mainly to stronger pricing, which more than offset labor and supply-chain cost pressures.
- Interest expense was $8.2 for the quarter and $24.0 for the nine months. Income tax expense was $0.2 and $0.4, respectively; a valuation allowance prevented recognition of a tax benefit on losses.
- Nine-month operating cash flow was negative $43.2, versus negative $35.8 a year earlier. Investing activities provided $6.2, financing activities provided $30.7, and cash declined $6.3 to $40.8.
- At October 31, cash was $40.8; current assets were $178.0 and current liabilities $111.3. Stockholders’ equity was a deficit of $41.3, versus positive equity of $32.1 at January 31.
- Debt disclosures show $250.0 principal of 11.5% senior secured notes due 2025 and $30.0 outstanding under the ABL facility. Capital lease obligations were $10.1. Net ABL availability was $30.0 after a $10.0 FCCR holdback; reported total liquidity, including cash and gross availability, was $80.8.
Material changes versus prior comparable periods
- Quarterly revenue nearly doubled, with growth in all three regions; management cited increased activity and pricing. Quarterly segment revenue was $36.5 in the Rocky Mountains, $45.8 in the Southwest, and $56.7 in Northeast/Mid-Con.
- Quarterly operating loss narrowed to $10.4. For the nine months, the much smaller operating and net losses primarily reflect 2020 impairment and other charges of $213.1, versus $0.8 in 2021, as well as higher activity, pricing and integration savings.
- Quarterly SG&A was $14.8, compared with $14.1; as a share of revenue it fell to 10.6% from 19.9%. Nine-month SG&A declined to $44.1 from $69.6, partly because 2020 included $28.9 of merger and integration costs.
- Operating cash use increased year over year, principally due to higher accounts receivable from increased revenue and utilization. Cash generation remained negative despite the recovery in operations.
- The company reported approximately $46.0 of annualized merger cost savings implemented by the end of Q1 2021 and an additional $4.4 of annualized savings fully implemented by Q2.
Outlook, commentary and risks
- Management reported improving activity and pricing, citing a U.S. rig count of 544 at October 31, up 11.5% from July 31. It expected further activity and pricing improvement through the remainder of 2021 if pandemic impacts eased, economic activity increased and commodity prices remained strong. No numerical revenue or earnings guidance was provided.
- 2021 capital expenditure guidance was $9.0–$11.0, reduced from $14.0–$16.0; nine-month spending was $7.5. The company said cash, ABL availability, its equity distribution program and forecast cash flows were expected to fund operations, debt service and planned capex for at least 12 months, while cautioning that forecasts and financing access were uncertain.
- The company used $30.0 of ABL borrowings during the nine months and sold shares under an at-the-market program, generating $4.8 net of costs. The program permits up to $50.0 of stock sales; dilution and access to equity markets are relevant considerations.
- The ABL springing fixed-charge coverage covenant applies if availability falls below the greater of $10.0 or 15% of the borrowing base. Availability exceeded that trigger and the company reported compliance, although its FCCR was below 1.0 at October 31.
- Principal risks include oilfield activity and commodity-price volatility, customer credit and collections, labor and supply-chain costs, COVID-19 impacts, access to capital, and operational, regulatory and environmental exposures. The company reported $5.0 of trade receivables reserved for customers in bankruptcy, primarily Magellan; the related $4.6 invoice balance had been fully reserved. Magellan’s Chapter 7 case and related insurance litigation were ongoing.
- Other notable items: Winter Storm Uri caused at least seven days of lost revenue in February 2021; the estimated useful lives of certain small tools were shortened, adding approximately $0.2 of monthly depreciation prospectively; and the company had $69.6 of future minimum operating lease payments. No impairment indicators were identified for the quarter.
Most important facts for investors to verify
- Whether revenue growth, improved pricing and integration savings translate into sustained positive operating cash flow, given the $43.2 nine-month operating cash outflow.
- Current borrowing-base availability, covenant headroom and the effect of the below-1.0 FCCR if availability approaches the springing-covenant threshold.
- Debt-service capacity, particularly the 11.5% notes, accrued interest and ABL refinancing or benchmark-rate transition arrangements.
- Receivable collections, including the outcome and potential recovery of the reserved Magellan balance.
- Actual capital spending versus the revised $9.0–$11.0 outlook, and the extent of future share issuance under the at-the-market program.
- Comparability of year-over-year results given the QES acquisition and the shortened 2021 fiscal year.