KLX Energy Services Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended October 31, 2020. Amounts are in U.S. dollars in millions, except per-share data. KLXE completed its all-stock acquisition of Quintana Energy Services (QES) on July 28, 2020. Q3 2020 includes a full quarter of combined results; the nine-month 2020 results include QES only from July 29 onward, so comparisons with 2019 are not like-for-like. Per-share figures reflect the July 2020 1-for-5 reverse stock split.
Financial performance
- Revenue: Q3 revenue was $70.9, down 47.3% from $134.5 a year earlier. Nine-month revenue was $190.1, down 57.3% from $445.2. Management attributed the declines to weak oilfield activity, COVID-19-related demand destruction, and oil-market volatility.
- Profitability: Q3 net loss was $38.3, or $4.56 per diluted share, versus a $69.8 loss, or $15.50 per share, in Q3 2019. Nine-month net loss widened to $301.8, or $50.26 per diluted share, from $71.3, or $16.20 per share. Q3 operating loss was $30.4 versus $63.1; nine-month operating loss was $278.8 versus $49.7.
- Margins: Cost of sales exceeded revenue in both periods: Q3 cost of sales was $80.1, or 113.0% of revenue, compared with 88.7% in 2019. For nine months, it was $220.4, or 115.9% of revenue, compared with 82.6%. Management cited negative operating leverage as revenue fell faster than fixed costs.
- Cash flow: Nine-month operating cash flow was negative $35.8, versus positive $53.2 in 2019. Investing cash outflow was $10.3 versus $94.5; financing cash flow was positive $2.4 versus negative $1.4. Cash declined $43.7 from January 31 to $79.8 at October 31.
- Liquidity and debt: Cash plus ABL availability totaled $106.2 at quarter-end, including $26.4 of availability and no ABL borrowings. Net carrying value of long-term debt was $243.6, representing $250.0 principal of 11.5% senior secured notes due 2025. Accrued interest was $14.4. ABL availability remained above the threshold triggering its fixed-charge coverage covenant; the company reported compliance, although its FCCR was below 1.0:1.0.
- Balance sheet and spending: Total assets were $397.6 and stockholders’ equity was $61.9 at October 31. Nine-month capital expenditures were $11.1, compared with $67.4 a year earlier.
Material changes and unusual items
- The QES merger added scale and service offerings; KLXE issued 3.4 million shares as merger consideration. A preliminary purchase-price allocation produced a $38.7 bargain purchase gain for the nine months, partially reduced by $2.4 in Q3 as the allocation was reassessed.
- Nine-month impairment and other charges were $213.1, including $208.7 of goodwill and long-lived-asset impairments and $4.4 of lease termination costs. The impairments eliminated goodwill and substantially reduced property and intangible asset values.
- Merger and integration costs were $9.8 in Q3 and $36.3 for nine months. The company also recorded $17.2 of nine-month stock-based compensation, including $15.1 from accelerated vesting associated with the merger.
- Q3 included a $2.5 insurance reimbursement related to a previously disclosed credit-card theft. The company recorded a $3.7 correction to depreciation expense; it also identified a $2.0 vehicle-lease termination gain recorded in the wrong quarter. Management concluded the errors were not material to previously issued financial statements.
- Segment presentation changed to show more corporate costs and assets separately and to report drilling revenue separately. These reclassifications did not change consolidated financial statements.
Outlook, risks, and controls
- Management said completions activity improved in Q3 as customers worked through drilled-but-uncompleted wells, while drilling activity recovered more slowly. It cited uncertainty about the timing and strength of a broader market recovery.
- KLXE had implemented approximately $40.0 of annualized merger cost savings and raised its expected annualized savings estimate to $46.0. It expected remaining synergies to be implemented by the end of fiscal Q1 2021.
- Management expected fiscal 2021 capital expenditures of $13.0–$15.0 and said cash and available ABL capacity were expected to fund operations and planned capital spending for at least the next 12 months. It cautioned that operating cash flow may not improve or remain positive.
- Principal risks include COVID-19 and oil-price volatility, lower customer activity or credit quality, collections and liquidity pressure, successful QES integration and synergy realization, and access to capital. The company also noted potential further integration charges.
- Controls: Management concluded disclosure controls were ineffective at October 31 due to a material weakness involving review of depreciation expense measurement for impaired property and equipment. Remediation efforts included personnel changes, additional accounting staff, training, and enhanced review controls; completion was not assured.
Important facts for investors to verify
- How much of reported performance and cash generation reflects the severe activity downturn versus QES’s partial-period inclusion and merger-related items.
- Whether KLXE achieves the $46.0 annualized savings target and completes integration without significant additional charges.
- Cash burn, borrowing-base availability, collections, and compliance with the ABL facility as activity and receivables change.
- Progress in remediating the material weakness and whether future reporting identifies additional control issues or accounting adjustments.
- Assumptions supporting the impairment valuations, QES purchase-price allocation, and expected capital spending and liquidity runway.