KLX Energy Services Holdings, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended January 31, 2019. The filing also reports the fourth quarter ended that date; this is not a calendar-year 2018 quarterly filing. Dollar amounts are in millions unless noted.
Business context
KLX provides completion, well-intervention and production services and equipment to onshore oil and gas customers in the United States, across Southwest, Rocky Mountains and Northeast segments. It completed its spin-off from KLX Inc. on September 14, 2018 and became a standalone public company. Motley, a large-diameter coiled-tubing provider, was acquired in November 2018.
Financial results and liquidity
| Metric | FY ended Jan. 31, 2019 | Prior year |
|---|---|---|
| Revenue | $495.3 | $320.5 |
| Gross profit / margin | $124.9 / 25.2% | $51.4 / 16.0% |
| Operating earnings (loss) / margin | $22.1 / 4.5% | $(24.0) / (7.5)% |
| Net earnings (loss) | $14.4 | $(24.1) |
| Operating cash flow | $62.0 | $(9.4) |
| Capital expenditures | $84.0 | $49.4 |
| Cash and working capital at year-end | $163.8 and $223.1 | No cash; working capital $38.1 |
Fiscal 2018 included $30.6 of specified costs related principally to the spin-off, KLX/Boeing transaction, debt-facility amendment, Motley acquisition and accelerated stock compensation. Excluding these costs, management reported operating earnings of $52.7, or approximately 10.6% of revenue; this is a non-GAAP adjustment described by the company. Fourth-quarter revenue was $143.9, up 52.6% from $94.3 a year earlier; quarterly net earnings were $4.9 versus a loss of $4.0.
Year-end debt was $250.0 principal amount of 11.5% senior secured notes due 2025, shown at $242.2 net of unamortized issuance costs. The $100.0 asset-based revolving credit facility had no borrowings outstanding; reported availability was approximately $84.9, subject to its borrowing base. The company reported $7.1 of net interest expense. Operating cash flow less capital expenditures was negative $22.0, before acquisition spending and other investing activity.
Changes versus the prior year
- Revenue rose 54.5%; all three regions grew: Southwest 70.0%, Rocky Mountains 41.5% and Northeast 54.0%.
- Completion, production and intervention revenue increased 77.2%, 50.4% and 21.0%, respectively.
- Operating results moved from a $24.0 loss to $22.1 of earnings, including the $30.6 of specified costs. Cost of sales fell to 74.8% of revenue from 84.0%, reflecting higher activity, service mix and operating leverage.
- Cash from operations improved from a $9.4 use to $62.0 provided. Cash investment increased, including $84.0 of capital expenditures and $140.0 paid for Motley, net of cash acquired.
Outlook, management commentary and risks
- Management expected approximately $100.0 of capital expenditures for the year ending January 31, 2020, including expansion of service offerings and coiled-tubing deployment. It stated that cash, operating cash flow and available ABL capacity were expected to fund operations and planned spending for at least 12 months. No revenue or earnings guidance was provided.
- Management attributed growth to more new customers, broader services to existing customers, new proprietary offerings and Motley. It noted a 44% oil-price decline from October to December 2018 and a double-digit reduction in active frac cores during the fourth quarter, partly offset by new offerings and Motley.
- Subsequent to year-end, the company acquired Tecton and Red Bone in March 2019 for approximately $82.0 in aggregate, comprising about $53.0 in shares and $29.0 in cash, including debt retirement.
- Key risks include commodity-price and E&P spending volatility, competitive pricing and utilization, weather and seasonality, skilled-labor and equipment availability, safety and environmental liabilities, regulation of hydraulic fracturing, and acquisition integration. The 11.5% notes and ABL facility impose restrictions, including limits on dividends and other payments. The company said it did not intend to pay dividends.
- Historical pre-spin-off results include allocated parent-company costs and may not represent standalone expenses. The company expects recurring annual public-company costs to be about $8.0 higher than historical allocated expenses. Deferred tax assets had a full valuation allowance of $67.7 at year-end.
Most important facts for investors to verify
- Reconcile reported operating earnings of $22.1 with management’s $52.7 figure excluding $30.6 of specified costs, and assess which costs may recur.
- Confirm post-year-end performance, especially activity, pricing and customer demand following the late-2018 oil-price decline.
- Review cash conversion and investment needs: operating cash flow was $62.0 against $84.0 of capital expenditures, before acquisition spending.
- Assess debt-service capacity under the 11.5% notes, ABL borrowing-base availability and the covenants, including the effect of the March 2019 acquisitions.
- Track integration and returns from Motley, Tecton and Red Bone, and verify whether planned 2020 capital spending and coiled-tubing expansion remain appropriate.