KLX Energy Services Holdings, Inc. — Q2 2023 Form 10-Q
Business and period: KLX provides oilfield services and products to onshore oil and gas producers across U.S. basins. This unaudited report covers the three and six months ended June 30, 2023; dollar amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $234.0 | $184.4 | $473.6 | $336.7 |
| Operating income (loss) | $19.6 | $1.4 | $38.5 | $(10.1) |
| Net income (loss) | $11.4 | $(7.5) | $20.8 | $(27.4) |
| Diluted EPS | $0.71 | $(0.67) | $1.37 | $(2.58) |
| Operating cash flow | Not separately presented | $51.4 | $(14.6) |
- Q2 operating margin was approximately 8.4% and net margin approximately 4.9%; cost of sales fell to 74.1% of revenue from 81.8%. For the first half, cost of sales was 74.8% of revenue versus 84.9%.
- Cash and cash equivalents were $82.1 at June 30, up from $57.4 at December 31, 2022. The company reported $61.6 of ABL availability and total available liquidity of $143.7.
- Debt principal was $287.3: $237.3 of 11.5% senior secured notes due 2025 and $50.0 drawn under the ABL. Debt carrying value was $283.8. Interest expense was $8.5 in Q2 and $17.8 for the first half.
- Six-month capital expenditures were $26.5, compared with $13.6 a year earlier. Stockholders’ equity was $39.7, versus a $15.8 deficit at year-end 2022.
Changes and notable items
- Revenue rose 26.9% in Q2 and 40.7% in the first half year over year. Management attributed the increases to stronger activity and pricing; price contributed about 83% of Q2 growth and 67% of first-half growth, with the balance from volume.
- Operating results improved across all three regions. Higher pricing and activity supported the improvement, while corporate and other costs increased, including non-recurring Greene’s acquisition costs.
- KLX acquired Greene’s Energy Group on March 8, 2023, in an all-stock transaction issuing approximately 2.4 million shares. The company said integration was substantially complete and expected $2.0–$3.0 of cost synergies. The preliminary purchase accounting produced a $2.0 bargain purchase gain for the first half; valuation work remains subject to change.
- Operating cash flow improved to $51.4 from cash use of $14.6, which management attributed to higher profitability and working-capital management. Cash from operations funded a portion of capital spending and other needs; cash increased by $24.7 in the first half.
- A June 2023 amendment increased the ABL commitment from $100.0 to $120.0 and extended maturity to 2025, with the date dependent on whether the notes remain outstanding. The company reported compliance with the facility and availability above the springing-covenant threshold.
Outlook, risks, and other disclosures
- Management expects 2023 capital expenditures of $45.0–$55.0, including $35.0–$40.0 for maintenance. It said current cash, ABL availability and forecast operating cash flows should fund operations and planned capital expenditures for at least the next 12 months; it cautioned that continued improvement is not assured. No revenue or earnings guidance is provided in the filing text.
- Management described oilfield demand as cyclical and cited commodity-price volatility, inflation, higher labor and input costs, customer activity, competition, and uncertainty in the global economy as risks. U.S. rig count declined 13% from year-end 2022 through June 30, 2023; WTI had fallen 11.9% from January 1 to June 30, then risen 15.8% through July 31.
- Both the ABL and senior notes mature in 2025. Management noted that refinancing may be unavailable or more costly and that future debt service depends on operating performance and capital-market conditions.
- Routine litigation and environmental matters were disclosed; management did not expect them to have a material adverse effect. Disclosure controls were deemed effective as of June 30. A new ERP system was implemented in Q2, with related internal controls planned for effectiveness testing.
Investor verification priorities
- Track operating cash generation, working-capital movements, capital spending, and whether liquidity remains adequate through the 2025 debt maturities.
- Verify realization and timing of the Greene’s $2.0–$3.0 expected synergies, and review final purchase-price allocation adjustments.
- Assess sustainability of pricing and margins against labor-cost inflation, softer rig counts, and commodity-market volatility.
- Review refinancing plans, ABL availability and covenant headroom, and the cost and dilution implications of any recapitalization or equity issuance.
- Monitor ERP-related control testing and any material updates to risk factors or contingencies.