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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2022
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to

Commission File No. 001-38609
 KLX Energy Services Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware36-4904146
(State of Incorporation)(I.R.S. Employer Identification No.)

3040 Post Oak Boulevard, 15th Floor
Houston, TX 77056
(832) 844-1015

(Address, including zip code, and telephone number, including area code, of principal executive offices of registrant)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.01 Par ValueKLXEThe Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The registrant has one class of common stock, $0.01 par value, of which 12,275,413 shares were outstanding as of November 4, 2022.



Table of Contents
KLX Energy Services Holdings, Inc.
Form 10-Q
Table of Contents

2

Table of Contents
PART 1 – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

KLX Energy Services Holdings, Inc.
Condensed Consolidated Balance Sheets
(In millions of U.S. dollars and shares, except per share data)
(Unaudited)
September 30, 2022December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$41.4 $28.0 
Accounts receivable–trade, net of allowance of $5.8 and $6.2
142.8 103.2 
Inventories, net25.9 22.4 
Other current assets14.9 11.1 
Total current assets225.0 164.7 
Property and equipment, net 166.3 171.0 
Operating lease assets40.5 47.4 
Intangible assets, net2.0 2.2 
Other assets6.3 2.4 
Total assets$440.1 $387.7 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable$84.6 $72.1 
Accrued interest12.7 5.0 
Accrued liabilities36.1 24.1 
Current portion of operating lease obligations14.4 15.9 
Current portion of finance lease obligations8.7 5.6 
Total current liabilities156.5 122.7
Long-term debt295.6 274.8 
Long-term operating lease obligations26.0 31.5 
Long-term finance lease obligations17.5 9.1 
Other non-current liabilities0.4 1.0 
Commitments, contingencies and off-balance sheet arrangements (Note 7)
Stockholders’ deficit:
Common stock, $0.01 par value; 110.0 authorized; 12.6 and 10.5 issued
0.1 0.1 
Additional paid-in capital490.2 478.1 
Treasury stock, at cost, 0.4 shares and 0.3 shares
(4.6)(4.3)
Accumulated deficit(541.6)(525.3)
Total stockholders’ deficit(55.9)(51.4)
Total liabilities and stockholders' deficit$440.1 $387.7 

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents
KLX Energy Services Holdings, Inc.
Condensed Consolidated Statements of Operations
(In millions of U.S. dollars, except per share data)
(Unaudited)
Three Months EndedNine Months Ended
September 30, 2022October 31, 2021September 30, 2022October 31, 2021
Revenues$221.6 $139.0 $558.3 $341.7 
Costs and expenses:
   Cost of sales168.8120.7 454.7308.5 
   Depreciation and amortization14.213.7 41.943.6 
   Selling, general and administrative18.014.8 51.044.1 
   Research and development costs0.20.2 0.40.4 
   Impairment and other charges   0.8 
   Bargain purchase gain   0.5 
Operating income (loss)20.4 (10.4)10.3 (56.2)
Non-operating expense:
   Interest expense, net9.0 8.2 26.0 24.0 
Net income (loss) before income tax11.4 (18.6)(15.7)(80.2)
   Income tax expense0.3 0.2 0.6 0.4 
Net income (loss)$11.1 $(18.8)$(16.3)$(80.6)
Net income (loss) per share-basic$0.96 $(2.19)$(1.49)$(9.60)
Net income (loss) per share-diluted$0.96 $(2.19)$(1.49)$(9.60)

See accompanying notes to condensed consolidated financial statements.
4

Table of Contents
KLX Energy Services Holdings, Inc.
Condensed Consolidated Statements of Stockholders' Deficit
Nine Months Ended September 30, 2022 and October 31, 2021
(In millions of U.S. dollars and shares)
(Unaudited)
Common StockAdditional Paid-in CapitalTreasury StockAccumulated DeficitTotal Stockholders’ Deficit
Shares Amount
Balance at December 31, 202110.5 $0.1 $478.1 $(4.3)$(525.3)$(51.4)
Restricted stock, net of forfeitures0.2 — 0.7 — — 0.7 
Purchase of treasury stock— — — (0.3)— (0.3)
Issuance of common stock, net of cost0.7 — 3.7 — — 3.7 
Net loss— — — — (19.9)(19.9)
Balance at March 31, 202211.4 0.1 482.5 (4.6)(545.2)(67.2)
Restricted stock, net of forfeitures— — 0.8 — — 0.8 
Issuance of common stock, net of cost0.9 — 4.6 — — 4.6 
Net loss— — — — (7.5)(7.5)
Balance at June 30, 202212.3 0.1 487.9 (4.6)(552.7)(69.3)
Restricted stock, net of forfeitures— — 0.7 — — 0.7 
Issuance of common stock, net of cost0.3 — 1.6 — — 1.6 
Net income— — — — 11.1 11.1 
Balance at September 30, 202212.6 $0.1 $490.2 $(4.6)$(541.6)$(55.9)
Common StockAdditional Paid-in CapitalTreasury
Stock
Accumulated
Deficit
Total Stockholders’ Deficit
 SharesAmount
Balance at January 31, 20218.6 $0.1 $469.1 $(4.0)$(433.1)$32.1 
Adjustment to beginning period Retained Earnings as a result of Topic 842 adoption— — — — 1.6 1.6 
Restricted stock, net of forfeitures0.5 — 0.8 — — 0.8 
Purchase of treasury stock— — — (0.3)— (0.3)
Net loss— — — — (36.8)(36.8)
Balance at April 30, 20219.1 0.1 469.9 (4.3)(468.3)(2.6)
Restricted stock, net of forfeitures— — 1.0 — — 1.0 
Issuance of common stock, net of cost0.1 — — — —  
Net loss— — — — (25.0)(25.0)
Balance at July 31, 20219.2 0.1 470.9 (4.3)(493.3)(26.6)
Restricted stock, net of forfeitures— — 0.9 — — 0.9 
Issuance of common stock, net of cost1.0 — 4.8 — — 4.8 
Net loss— — — — (18.8)(18.8)
Balance at October 31, 202110.2 $0.1 $476.6 $(4.3)$(512.1)$(39.7)
See accompanying notes to condensed consolidated financial statements.
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KLX Energy Services Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
Nine Months Ended
September 30, 2022October 31, 2021
Cash flows from operating activities:
Net loss$(16.3)$(80.6)
Adjustments to reconcile net loss to net cash flows used in operating activities
Depreciation and amortization41.9 43.6 
Impairment and other charges 0.8 
Non-cash compensation2.2 2.7 
Amortization of deferred financing fees1.1 0.9 
Provision for inventory reserve2.4 0.6 
Change in allowance for doubtful accounts(0.1)0.4 
Gain on disposal of property, equipment and other(8.7)(7.1)
Bargain purchase gain 0.5 
Other(0.1) 
Changes in operating assets and liabilities:
   Accounts receivable(39.6)(36.3)
   Inventories(6.0)(2.5)
   Other current and non-current assets11.3 3.0 
   Accounts payable7.4 22.8 
   Other current and non-current liabilities8.4 8.0 
     Net cash flows provided by (used in) operating activities3.9 (43.2)
Cash flows from investing activities:
Purchases of property and equipment(26.1)(7.5)
Proceeds from sale of property and equipment11.8 13.7 
     Net cash flows (used in) provided by investing activities(14.3)6.2 
Cash flows from financing activities:
Purchase of treasury stock(0.3)(0.3)
Borrowings on ABL Facility20.0 30.0 
Proceeds from stock issuance, net of costs9.9 4.8 
Payments on finance lease obligations(5.5)(2.0)
Payments of debt issuance costs(0.3) 
Proceeds from finance lease refinancing1.4  
Change in financed payables(1.4)(1.8)
     Net cash flows provided by financing activities23.8 30.7 
     Net increase (decrease) in cash and cash equivalents13.4 (6.3)
Cash and cash equivalents, beginning of period28.047.1
Cash and cash equivalents, end of period$41.4 $40.8 
Supplemental disclosures of cash flow information:
Cash paid during period for:
Income taxes paid, net of refunds$0.6 $0.2 
Interest17.2 15.4 
Supplemental schedule of non-cash activities:
Accrued capital expenditures$1.0 $3.5 
See accompanying notes to condensed consolidated financial statements.

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KLX Energy Services Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited – U.S. dollars in millions, except per share data)

NOTE 1 - Description of Business and Basis of Presentation

Description of Business

KLX Energy Services Holdings, Inc. (the “Company”, “KLXE”, “KLX Energy Services”, “we”, “us” or “our”) is a growth-oriented provider of diversified oilfield services to leading onshore oil and natural gas exploration and production (“E&P”) companies operating in both conventional and unconventional plays in major active basins throughout the United States. The Company delivers mission critical oilfield services focused on drilling, completion, production and intervention activities for technically demanding wells in over 60 service and support facilities located throughout the United States.

The Company offers a complementary suite of proprietary products and specialized services that is supported by technically skilled personnel and a broad portfolio of innovative in-house manufacturing, repair and maintenance capabilities. KLXE’s primary services include coiled tubing, directional drilling, fishing, flowback, fluid pumping, hydraulic fracturing rentals, pressure control, pressure pumping, rig-assisted snubbing, special situation services, thru-tubing and wireline. KLXE’s primary rentals include accommodation units, blow out preventers, downhole tools, hydraulic fracturing stacks and tubulars. KLXE’s primary product offering includes a suite of proprietary dissolvable and composite plugs along with casing equipment, float equipment, inflatables, liner hangers and stage cementing tools.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments which, in the opinion of the Company’s management, are considered necessary for a fair presentation of the results of operations for the periods shown are of a normal recurring nature and have been reflected in the condensed consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year 2022 or for any future period. The information included in these condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in the Company’s 2021 Transition Report on Form 10-K filed with the SEC on March 14, 2022.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
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NOTE 2 - Recent Accounting Pronouncements

Accounting Standard Updates not yet Adopted
    
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments. This ASU is intended to update the measurement of credit losses on financial instruments. This update improves financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope by using the Current Expected Credit Losses (“CECL”) model. This guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. The new accounting standard introduces the CECL methodology for estimating allowances for credit losses. The Company is an oilfield service company and, as of September 30, 2022, had a third-party accounts receivable balance, net of allowance, of $142.8. Topic 326 is not expected to have a material impact on the Company’s condensed consolidated financial statements.

Recently Adopted Accounting Standard Updates

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”). The amendments in this ASU are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments in this ASU are effective for all entities, if elected, through December 31, 2022. In September 2022, we entered into a Third Amendment to our ABL Facility (as defined below), which, among other things, replaced LIBOR as the benchmark rate with CME Term Secured Overnight Financing Rate (“Term SOFR”) as administered by CME Group Benchmark Administration, Ltd. See Note 5 for further discussion regarding our ABL Facility. In connection with the Amendment, we adopted the above standard in the third quarter of fiscal year 2022 and have elected the optional expedients for contracts under the scope of Topic 470, Debt. We have concluded that the modification to the ABL Facility is not substantial. This adoption did not have a material impact on the Company’s condensed consolidated financial statements.

NOTE 3 - Inventories, Net

Inventories consisted of the following:
September 30, 2022December 31, 2021
Spare parts$17.9 $14.7 
Plugs6.3 6.0 
Consumables3.1 2.4 
Other2.6 2.0 
   Subtotal29.9 25.1 
Less: Inventory reserve(4.0)(2.7)
   Total inventories$25.9 $22.4 

Inventories are made up of spare parts, composite and dissolvable plugs and consumables used to perform services for customers. The Company values inventories at the lower of cost or net realizable value. Inventories are reported net of inventory reserve of $4.0 and $2.7 as of September 30, 2022 and December 31, 2021, respectively.
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NOTE 4 - Property and Equipment, Net

Property and equipment consisted of the following:
Useful Life (Years)September 30, 2022December 31, 2021
Land, buildings and improvements140$33.2 $38.9 
Machinery120214.6211.4
Furniture and equipment115190.6179.9
ROU assets - finance leases12032.916.5
   Total property and equipment471.3446.7
Less: Accumulated depreciation(309.7)(280.1)
Add: Construction in progress4.74.4
   Property and equipment, net$166.3 $171.0 

Depreciation expense related to owned fixed assets was $12.2 and $12.7 for the three months ended September 30, 2022 and October 31, 2021, respectively, and $36.7 and $41.8 for the nine months ended September 30, 2022 and October 31, 2021, respectively. Finance lease amortization expense was $1.9 and $0.9, respectively, for the three months ended September 30, 2022 and October 31, 2021, and $5.0 and $1.6, respectively, for the nine months ended September 30, 2022 and October 31, 2021.

Assets Held for Sale

As of September 30, 2022, the Company’s condensed consolidated balance sheet included assets classified as held for sale of $4.9. The assets held for sale are reported within other current assets on the condensed consolidated balance sheet and represent the value of three operational facilities, land and select equipment. These assets were being actively marketed for sale as of September 30, 2022 and are recorded at the lower of their carrying value or fair value less costs to sell.
NOTE 5 - Long-Term Debt
Outstanding long-term debt consisted of the following:
September 30, 2022December 31, 2021
Senior Secured Notes$250.0 $250.0 
ABL Facility50.0 30.0 
Total principal outstanding300.0 280.0 
Unamortized debt issuance costs4.4 5.2 
Total debt, net$295.6 $274.8 
As of September 30, 2022, long-term debt consisted of $250.0 principal amount of 11.5% senior secured notes due 2025 (the “Notes”) offered pursuant to Rule 144A under the Securities Act of 1933 (as amended, the “Securities Act”) and to certain non-U.S. persons outside the United States in compliance with Regulation S under the Securities Act. On a net basis, after taking into consideration unamortized debt issuance costs for the Notes, total debt related to the Notes as of September 30, 2022 was $245.6. The Notes bear interest at an annual rate of 11.5%, payable semi-annually in arrears on May 1 and November 1. Accrued interest related to the Notes was $12.0 as of September 30, 2022.

As of September 30, 2022, the Company also had a $100.0 asset-based revolving credit facility pursuant to a senior secured credit agreement dated August 10, 2018 (as amended by the Amendment and other amendments, the “ABL Facility”). The ABL Facility became effective on September 14, 2018 and matures in September 2024. On October 22, 2018, the ABL Facility was amended primarily to permit the Company to issue the Notes and acquire Motley Services, LLC (“Motley”) and the definition of the required ratio (as
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defined in the ABL Facility) was also amended as a result of the issuance of $250.0 of Notes on October 31, 2018.

On September 22, 2022, the Company entered into a Third Amendment to the ABL Facility, with certain of its subsidiaries party thereto, as guarantors, with JPMorgan Chase Bank, N.A., as administrative agent and an issuing lender, and the other lenders and issuing lenders party thereto from time to time (the “Amendment”).

The Amendment, among other things, (i) extends the maturity date of the ABL Facility by a year from September 14, 2023 to September 15, 2024, (ii) increases the applicable margin by 0.50%, (iii) replaces LIBOR as the benchmark rate with Term SOFR, (iv) provides the Company with the ability to redeem, repurchase, defease or otherwise satisfy its outstanding Notes using proceeds of equity issuances or by converting or exchanging Notes for equity, (v) resets consolidated EBITDA solely for purposes of calculating the springing fixed charge coverage ratio (“FCCR”) to be annualized beginning with the fiscal quarter ended as of June 30, 2022 until the fourth fiscal quarter ended thereafter (provided that fixed charges will continue to be calculated on a trailing-twelve month basis), (vi) requires that, after giving effect to any borrowing and the use of proceeds thereof, the Company not have more than $35.0 in excess cash on its balance sheet and (vii) increases the availability trigger for a cash dominion event.

The ABL Facility is tied to a borrowing base formula and has no maintenance financial covenants as long as the minimum level of borrowing availability is maintained. The ABL Facility is secured by, among other things, a first priority lien on the Company’s accounts receivable and inventory and contains customary conditions precedent to borrowing and affirmative and negative covenants.

The ABL Facility includes a springing financial covenant which requires the Company’s consolidated FCCR to be at least 1.0 to 1.0 if availability falls below the greater of $15.0 or 20.0% of the line cap. At all times during the nine months ended September 30, 2022, availability exceeded this threshold, and the Company was not subject to this financial covenant. As of September 30, 2022, the FCCR was above 1.0 to 1.0, and the Company was in full compliance with its ABL Facility.

Borrowings outstanding under the ABL Facility were $50.0 as of September 30, 2022 and bear interest at a rate equal to SOFR plus the applicable margin (as defined in the ABL Facility). The effective interest rate under the ABL Facility was approximately 8.3% on September 30, 2022. Total letters of credit outstanding under the ABL Facility were $5.0 both at September 30, 2022 and at December 31, 2021. Accrued interest under the ABL Facility was $0.7 as of September 30, 2022.

The financial services industry and market participants continue to work towards transitioning away from Interbank Offered Rate (“IBOR”), including the LIBOR, which are in the process of being phased out. The Amendment to the ABL Facility, among other terms, replaces LIBOR with Term SOFR. See Note 2 for further discussion on the adoption of the related accounting standard ASU 2020-04.

We have funds available of $45.0 each on the September 30, 2022 borrowing base certificate.
NOTE 6 - Fair Value Information

All financial instruments are carried at amounts that approximate estimated fair value. The fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. Assets measured at fair value are categorized based upon the lowest level of significant input to the valuations.

Level 1 – quoted prices in active markets for identical assets and liabilities.

Level 2 – quoted prices for identical assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical assets and liabilities.

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Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The carrying amounts of cash and cash equivalents, accounts receivable-trade and accounts payable represent their respective fair values due to their short-term nature. There was $50.0 debt outstanding under the ABL Facility as of September 30, 2022. The fair value of the ABL Facility approximates its carrying value as of September 30, 2022.

The following tables present the placement in the fair value hierarchy of the Notes, based on market prices for publicly traded debt, as of September 30, 2022 and December 31, 2021:

Fair value measurements at reporting date using
September 30, 2022Level 1Level 2Level 3
Senior Secured Notes, 11.5 Percent Due 2025
$177.5 $ $177.5 $ 
Total Senior Secured Notes$177.5 $ $177.5 $ 

Fair value measurements at reporting date using
December 31, 2021Level 1Level 2Level 3
Senior Secured Notes, 11.5 Percent Due 2025
$136.3 $ $136.3 $ 
Total Senior Secured Notes$136.3 $ $136.3 $ 

The following tables present the placement in the fair value hierarchy of Assets Held for Sale, as disclosed in Note 4, based on sales contracts and comparative price quotes, as of September 30, 2022 and December 31, 2021:

Fair value measurements at reporting date using
September 30, 2022Level 1Level 2Level 3
Assets Held for Sale$2.3 $ $2.3 $ 
Total Assets Held for Sale$2.3 $ $2.3 $ 

Fair value measurements at reporting date using
December 31, 2021Level 1Level 2Level 3
Assets Held for Sale$1.9 $ $1.9 $ 
Total Assets Held for Sale$1.9 $ $1.9 $ 

During the three and nine months ended September 30, 2022, the before-tax loss (gain) related to Assets Held for Sale was $0.1 and $(0.3), respectively. During the three and nine months ended October 31, 2021, the before-tax loss related to Assets Held for Sale was $0.5 and $1.0, respectively.

NOTE 7 - Commitments, Contingencies and Off-Balance-Sheet Arrangements

Environmental Regulations & Liabilities

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The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for the protection of the environment. The Company continues to monitor the status of these laws and regulations. However, the Company cannot predict the future impact of such laws and regulations, as well as standards and requirements, on its business, which are subject to change and can have retroactive effectiveness. Currently, the Company has not been fined, cited or notified of any environmental violations or liabilities that would have a material adverse effect on its condensed consolidated financial statement position, results of operations, liquidity or capital resources. However, management does recognize that by the very nature of its business, material costs could be incurred in the future to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions that may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification.

Litigation

The Company is at times either a plaintiff or a defendant in various legal actions arising in the normal course of business, the outcomes of which, in the opinion of management, neither individually nor in the aggregate are likely to result in a material adverse effect on the Company’s condensed consolidated financial statements.

On March 9, 2021, the Company filed claims in the District Court of Harris County, Texas against Magellan E&P Holdings, Inc. (“Magellan”), Redmon-Keys Insurance Group, Inc. and certain underwriters at Lloyd's (“Underwriters”) to recover $4.6 owed on invoices duly issued by the Company for services rendered on behalf of the defendants in response to an offshore well blowout near Bob Hall Pier in Corpus Christi, Texas. Magellan did not dispute the invoices but alleged an inability to pay prior to obtaining funding from Underwriters under Magellan's Owner's Extra Expense Policy. On March 19, 2021, Underwriters filed a declaratory judgment action in the United States District Court for the Southern District of Texas seeking a declaration that certain blowout related expenses fall outside of policy coverage. On March 30, 2021, Magellan filed for bankruptcy pursuant to Chapter 7 of the U.S. bankruptcy code. The bankruptcy proceedings are ongoing. We expect that the trustee will continue to pursue claims against Underwriters as well as preference and other claims to maximize the value of the Chapter 7 estate for the benefit of trade creditors, including KLXE. During the year ended January 31, 2021, the Company reserved the full amount of its invoices totaling $4.6 as a prudent action in light of the Chapter 7 filing.

Indemnities, Commitments and Guarantees

During its ordinary course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, as well as indemnities to other parties to certain acquisition agreements. The duration of these indemnities, commitments and guarantees varies and, in certain cases, is indefinite. Many of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments the Company could be obligated to make. However, the Company is unable to estimate the maximum amount of liability related to its indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events that are not reasonably determinable. Management believes that any liability for these indemnities, commitments and guarantees would not be material to the accompanying condensed consolidated financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.

NOTE 8 - Stockholders' Deficit
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Equity Distribution Agreement

On June 14, 2021, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Piper Sandler & Co. as sales agent (the “Agent”). Pursuant to the terms of the Equity Distribution Agreement, the Company may sell from time to time through the Agent (the “ATM Offering”) the Company’s common stock, par value $0.01 per share, having an aggregate offering price of up to $50.0 (the “Common Stock”).

Any Common Stock offered and sold in the ATM Offering will be issued pursuant to the Company’s shelf registration statement on Form S-3 (Registration No. 333-256149) filed with the SEC on May 14, 2021 and declared effective on June 11, 2021 (the “Registration Statement”), the prospectus supplement relating to the ATM Offering filed with the SEC on June 14, 2021 and any applicable additional prospectus supplements related to the ATM Offering that form a part of the Registration Statement. Sales of Common Stock under the Equity Distribution Agreement may be made in any transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act.

The Equity Distribution Agreement contains customary representations, warranties and agreements by the Company, indemnification obligations of the Company and the Agent, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. Under the terms of the Equity Distribution Agreement, the Company will pay the Agent a commission equal to 3.0% of the gross sales price of the Common Stock sold.

The Company plans to use the net proceeds from the ATM Offering, after deducting the Agent’s commissions and the Company’s offering expenses, for general corporate purposes, which may include, among other things, paying or refinancing all or a portion of the Company’s then-outstanding indebtedness, and funding acquisitions, capital expenditures and working capital.

During the three and nine months ended September 30, 2022, the Company sold 241,551 and 1,826,199 shares of Common Stock, respectively, for gross proceeds of approximately $1.7 and $10.1, respectively, and paid legal and administrative fees of $0.1 and $0.2, respectively. During the three and nine months ended October 31, 2021, the Company sold 1,070,000 and 1,130,216 shares of Common Stock, respectively, in exchange for gross proceeds of approximately $4.9 and $5.5, respectively, and paid fees to the sales agent and other legal and accounting fees of $0.1 and $0.7, respectively, to establish the ATM Offering.

Stock-Based Compensation

The Company has a Long-Term Incentive Plan (“LTIP”) under which the compensation committee of the Board of Directors (the “Board”) of the Company (the “Compensation Committee”) has the authority to grant stock options, stock appreciation rights, restricted stock, restricted stock units or other forms of equity-based or equity-related awards. Compensation cost for the LTIP grants is generally recorded on a straight-line basis over the vesting term of the shares based on the grant date value using the closing trading price.

On February 12, 2021, the stockholders of KLXE approved the KLX Energy Services Holdings, Inc. Long-Term Incentive Plan (Amended and Restated as of December 2, 2020) (the “Amended and Restated LTIP”), which, among other things, increased the total number of shares of Company Common Stock, par value $0.01 per share, and reserved for issuance under the Amended and Restated LTIP by 632,051 shares. A description of the Amended and Restated LTIP is included in the Company’s proxy statement, filed with the SEC on January 11, 2021.

Compensation cost recognized during the three and nine months ended September 30, 2022 and October 31, 2021 was related to grants of restricted stock as approved by the Compensation Committee. Stock-based compensation was $0.7 and $0.9 for the three months ended September 30, 2022 and October 31, 2021, respectively, and $2.2 and $2.7 for the nine months ended September 30, 2022 and October 31, 2021,
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respectively. Unrecognized compensation cost related to restricted stock awards made by the Company was $4.9 at September 30, 2022.
NOTE 9 - Income Taxes

Income tax expense was $0.3 and $0.6 for the three and nine months ended September 30, 2022, respectively, and was comprised primarily of state and local taxes, compared to $0.2 and $0.4 for the three and nine months ended October 31, 2021, respectively. The Company has a valuation allowance against its deferred tax balances and, as a result, it was unable to recognize a tax benefit on its year-to-date losses.

In response to the coronavirus pandemic (“COVID-19”), many governments have enacted measures to provide aid and economic stimulus. These measures include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act, which was enacted on March 27, 2020 in the United States, includes measures to assist companies, including temporary changes to income and non-income-based tax laws. The Company has deferred the employer portion of FICA tax payments of $2.0 through September 30, 2022. This deferral is included on the condensed consolidated balance sheet in accrued liabilities. The payment is due by December 31, 2022.

The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.
NOTE 10 - Segment Reporting

The Company is organized on a geographic basis. The Company’s reportable segments, which are also its operating segments, are comprised of the Rocky Mountains Region (the Bakken, Williston, DJ, Uinta, Powder River, Piceance and Niobrara basins), the Southwest Region (the Permian Basin and the Eagle Ford Shale) and the Northeast/Mid-Con Region (the Marcellus and Utica Shale as well as the Mid-Continent STACK and SCOOP and Haynesville Shale). The segments regularly report their results of operations and make requests for capital expenditures and acquisition funding to the Company's chief operational decision-making group (“CODM”). As a result, the Company has three reportable segments.

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The following table presents revenues and operating income (loss) by reportable segment:
Three Months EndedNine Months Ended
September 30, 2022October 31, 2021September 30, 2022October 31, 2021
Revenues
Rocky Mountains$66.5 $36.5 $162.9 $94.4 
Southwest68.5 45.8 180.4 126.8 
Northeast/Mid-Con86.6 56.7 215.0 120.5 
Total revenues221.6 139.0 558.3 341.7 
Operating income (loss)
Rocky Mountains11.7 (1.7)14.9 (11.1)
Southwest5.2 (4.1)6.8 (15.3)
Northeast/Mid-Con17.2 1.7 23.7 (8.9)
Corporate and other(13.7)(6.3)(35.1)(20.9)
Total operating income (loss)20.4 (10.4)10.3 (56.2)
Interest expense, net9.0 8.2 26.0 24.0 
Net income (loss) before income tax$11.4 $(18.6)$(15.7)$(80.2)

The following table presents revenues by service offering by reportable segment:

Three Months Ended
September 30, 2022October 31, 2021
Rocky
Mountains
SouthwestNortheast
/Mid-Con
TotalRocky
Mountains
SouthwestNortheast
/Mid-Con
Total
Drilling$7.3 $28.9 $20.8 $57.0 $3.5 $19.8 $15.4 $38.7 
Completion36.5 25.9 53.2 115.6 17.8 15.4 34.5 67.7 
Production15.2 7.4 4.7 27.3 10.2 6.2 3.1 19.5 
Intervention7.5 6.3 7.9 21.7 5.0 4.4 3.7 13.1 
Total revenues$66.5 $68.5 $86.6 $221.6 $36.5 $45.8 $56.7 $139.0 

Nine Months Ended
September 30, 2022October 31, 2021
Rocky
Mountains
SouthwestNortheast
/Mid-Con
TotalRocky
Mountains
SouthwestNortheast
/Mid-Con
Total
Drilling$17.7 $80.3 $53.9 $151.9 $6.8 $52.9 $35.7 $95.4 
Completion89.2 64.2 130.9 284.3 50.8 46.1 66.9 163.8 
Production36.1 19.1 12.0 67.2 23.9 15.9 8.3 48.1 
Intervention19.9 16.8 18.2 54.9 12.9 11.9 9.6 34.4 
Total revenues$162.9 $180.4 $215.0 $558.3 $94.4 $126.8 $120.5 $341.7 
The following table presents capital expenditures by reportable segment:
Three Months EndedNine Months Ended
September 30, 2022October 31, 2021September 30, 2022October 31, 2021
Rocky Mountains$3.6 $0.4 $6.9 $2.3 
Southwest3.6 0.7 7.5 2.6 
Northeast/Mid-Con5.3 0.7 11.7 2.5 
Corporate and other   0.1 
   Total capital expenditures$12.5 $1.8 $26.1 $7.5 
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The following table presents total assets by segment:
September 30, 2022December 31, 2021
Rocky Mountains$138.0 $127.7 
Southwest143.9 134.4 
Northeast/Mid-Con117.2 97.6 
   Total399.1 359.7 
Corporate and other41.0 28.0 
   Total assets$440.1 $387.7 

NOTE 11 - Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed using the weighted average common shares outstanding during the period. Diluted net income (loss) per common share is computed by using the weighted average common shares outstanding, including the dilutive effect of restricted shares based on an average share price during the period. For the three months ended September 30, 2022 and October 31, 2021, 0.5 and 0.5 million shares of the Company’s common stock, respectively, and for the nine months ended September 30, 2022 and October 31, 2021, 0.5 and 0.4 million shares of the Company’s common stock, respectively, were excluded from the determination of diluted net income (loss) per common share because their effect would have been anti-dilutive. The computations of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2022 and October 31, 2021 are as follows:
Three Months EndedNine Months Ended
September 30, 2022October 31, 2021September 30, 2022October 31, 2021
Net income (loss)$11.1 $(18.8)$(16.3)$(80.6)
(Shares in millions)
Basic weighted average common shares11.5 8.6 11.0 8.4 
Effect of dilutive securities - dilutive securities    
Diluted weighted average common shares11.5 8.6 11.0 8.4 
Basic net income (loss) per common share$0.96 $(2.19)$(1.49)$(9.60)
Diluted net income (loss) per common share$0.96 $(2.19)$(1.49)$(9.60)
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information to investors. This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes forward-looking statements that reflect our current expectations and projections about our future results, performance and prospects. Forward-looking statements include all statements that are not historical in nature or are not current facts. When used in this Quarterly Report, the words “believe,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” “may,” “might,” “should,” “could,” “will” or the negative of these terms or similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events.

These forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause our actual results, performance and prospects to differ materially from those expressed in, or implied by, these forward-looking statements. Factors that might cause such a difference
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include those discussed in our filings with the SEC, in particular those discussed under the headings “Risk Factors” in our Transition Report on Form 10-K for the fiscal year ended December 31, 2021 and in this Quarterly Report, including the following factors:

ongoing volatility in national and global crude oil demand and crude oil prices;
uncertainty regarding our future operating results;
our credit profile and our ability to renew or refinance our indebtedness;
legislative or regulatory changes and potential liability under federal and state laws and regulations;
general economic conditions, such as inflation and government efforts to reduce inflation, including increases in interest rates, or a prolonged recession;
increased costs and other changes in supply, demand and costs of equipment;
the market environment and impacts resulting from COVID-19, including the global supply chain disruptions and the government interventions into the financial markets and economy, among other factors;
overall domestic and global political and economic conditions, including the imposition of tariffs or trade or other economic sanctions, political instability or armed conflict, including the ongoing conflict in Ukraine;
the possibility of inefficiencies, curtailments or shutdowns in our customers’ operations, whether due to COVID-19 repercussions in the workforce or in response to reductions in demand;
our ability to maintain acceptable pricing for our services;
competitive conditions within the industry;
the loss of or interruption in operations of one or more key suppliers;
decreases in the rate at which oil and/or natural gas reserves are discovered and/or developed;
the impact of technological advances on the demand for our products and services;
customers' delays in obtaining permits for their operations;
hazards and operational risks that may not be fully covered by insurance;
the need to obtain additional capital or financing, and the availability and/or cost of obtaining such capital or financing;
limitations originating from our organizational documents, debt instruments and U.S. federal income tax obligations may impact our financial flexibility, our ability to engage in strategic transactions or our ability to declare and pay cash dividends on our common stock;
oilfield anti-indemnity provisions;
seasonal and adverse weather conditions that can affect oil and natural gas operations;
reliance on information technology resources and the inability to implement new technology and services;
the possibility of international conflicts, terrorist or cyber-attacks and the consequences of any such events;
increased labor costs or our ability to employ, or maintain the employment of, a sufficient number of key employees, technical personnel, and other skilled and qualified workers;
the inability to successfully consummate acquisitions or inability to manage potential growth; and
our ability to remediate any material weakness in, or to maintain effective, internal controls over financial reporting and disclosure controls and procedures.

In light of these risks and uncertainties, you are cautioned not to put undue reliance on any forward-looking statements in this Quarterly Report. These statements should be considered only after carefully reading this entire Quarterly Report. Except as required under the federal securities laws and rules and regulations of the SEC, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward-looking events discussed in this Quarterly Report not to occur.

All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statement that we or persons acting on our behalf may issue.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (U.S. dollars in millions, except per share data)

The following discussion and analysis should be read in conjunction with the historical condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report as well as our Transition Report on Form 10-K for the fiscal year ended December 31, 2021. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Quarterly Report.

The following discussion and analysis addresses the results of our operations for the three and nine months ended September 30, 2022, as compared to our results of operations for the three and nine months ended October 31, 2021. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods.

Company History

KLX Energy Services was initially formed from the combination of seven private oilfield service companies acquired during 2013 and 2014. Each of the acquired businesses was regional in nature and brought one or two specific service capabilities to KLX Energy Services. Once the acquisitions were completed, we undertook a comprehensive integration of these businesses to align our services, people and assets across all the geographic regions where we maintain a presence. In November 2018, we expanded our completion and intervention service offerings through the acquisition of Motley, a premier provider of large diameter coiled tubing services in the Permian Basin, further enhancing our completions business. We successfully completed the integration of the Motley business during fiscal 2018. On March 15, 2019, the Company acquired Tecton Energy Services (“Tecton”), a leading provider of flowback, drill-out and production testing services, operating primarily in the greater Rocky Mountains. In March 2019, the Company acquired Red Bone Services LLC (“Red Bone”), a premier provider of oilfield services primarily in the Mid-Continent region, providing fishing, non-hydraulic fracturing high pressure pumping, thru-tubing and certain other services. We successfully completed the integration of the Tecton and Red Bone businesses during fiscal 2019. We acquired Quintana Energy Services (“QES”) during the second quarter of 2020 and, by doing so, helped establish KLXE as an industry leading provider of diversified oilfield solutions across the full well lifecycle to the major onshore oil and gas producing regions of the United States.

The merger of KLXE and QES (the “Merger”) provided increased scale to serve a blue-chip customer base across the onshore oil and gas basins in the United States. The Merger combined two strong company cultures comprised of highly talented teams with shared commitments to safety, performance, customer service and profitability. The combination leveraged two of the largest fleets of coiled tubing and wireline assets, with KLXE becoming a leading provider of large diameter coiled tubing and wireline services and one of the largest independent providers of directional drilling to the U.S. market.

After closing the Merger, the Company has integrated personnel, facilities, processes and systems across all functional areas of the organization. Additional synergies may be realized as management continues to rationalize operational facilities and align common roles, processes and systems throughout each function and region. The Merger also enhanced the Company’s ability to effect further industry consolidation.

Looking ahead, the Company expects to continue to evaluate strategic, accretive consolidation opportunities that further strengthen the Company’s competitive positioning and capital structure and drive efficiencies, accelerate growth and create long‑term stockholder value.

Company Overview

We serve many of the leading companies engaged in the exploration and development of onshore conventional and unconventional oil and natural gas reserves in the United States. Our customers are
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primarily large independent and major oil and gas companies. We currently support these customer operations from over 60 service facilities located in the key major shale basins. We operate in three segments on a geographic basis, including the Rocky Mountains Region (the Bakken, Williston, DJ, Uinta, Powder River, Piceance and Niobrara basins), the Southwest Region (the Permian Basin, Eagle Ford Shale and the Gulf Coast as well as in industrial and petrochemical facilities) and the Northeast/Mid-Con Region (the Marcellus and Utica Shale as well as the Mid-Continent STACK and SCOOP and Haynesville Shale). Our revenues, operating earnings and identifiable assets are primarily attributable to these three reportable geographic segments. While we manage our business based upon these geographic groupings, our assets and our technical personnel are deployed on a dynamic basis across all of our service facilities to optimize utilization and profitability.

These expansive operating areas provide us with access to a number of nearby unconventional crude oil and natural gas basins, both with existing customers expanding their production footprint and third parties acquiring new acreage. Our proximity to existing and prospective customer activities allows us to anticipate or respond quickly to such customers’ needs and efficiently deploy our assets. We believe that our strategic geographic positioning will benefit us as activity increases in our core operating areas. Our broad geographic footprint provides us with exposure to the ongoing recovery in drilling, completion, production and intervention related service activity and will allow us to opportunistically pursue new business in basins with active drilling environments.

We work with our customers to provide engineered solutions across the lifecycle of the well by streamlining operations, reducing non-productive time and developing cost effective solutions and customized tools for our customers’ challenging service needs, including their technically complex extended reach horizontal wells. We believe future revenue growth opportunities will continue to be driven by increases in the number of new customers served and the breadth of services we offer to existing and prospective customers.

We offer a variety of targeted services that are differentiated by the technical competence and experience of our field service engineers and their deployment of a broad portfolio of specialized tools and proprietary equipment. Our innovative and adaptive approach to proprietary tool design has been employed by our in-house research and development (“R&D”) organization and, in selected instances, by our technology partners to develop tools covered by 30 patents and 5 pending patent applications, which we believe differentiates us from our regional competitors and also allows us to deliver more focused service and better outcomes in our specialized services than larger national competitors that do not discretely dedicate their resources to the services we provide.

We utilize contract manufacturers to produce our products which, in many cases, our engineers have developed from input and requests from our customers and customer-facing managers, thereby maintaining the integrity of our intellectual property while avoiding manufacturing startup and maintenance costs. This approach leverages our technical strengths, as well as those of our technology partners. These services and related products are modest in cost to the customer relative to other well construction expenditures but have a high cost of failure and are, therefore, critical to our customers’ outcomes. We believe our customers have come to depend on our decades of field experience to execute on some of the most challenging problems they face. We believe we are well positioned as a company to service customers when they are drilling and completing complex wells, and remediating both newer and older legacy wells.

We invest in innovative technology and equipment designed for modern production techniques that increase efficiencies and production for our customers. North American unconventional onshore wells are increasingly characterized by extended lateral lengths, tighter spacing between hydraulic fracturing stages, increased cluster density and heightened proppant loads. Drilling and completion activities for wells in unconventional resource plays are extremely complex, and downhole challenges and operating costs increase as the complexity and lateral length of these wells increase. For these reasons, E&P companies with complex wells increasingly prefer service providers with the scale and resources to deliver best-in-class solutions that evolve in real-time with the technology used for extraction. We believe we offer best-in-class service execution at the wellsite and innovative downhole technologies, positioning us to benefit from our ability to service technically
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complex wells where the potential for increased operating leverage is high due to the large number of stages per well.

We endeavor to create a next generation oilfield services company in terms of management controls, processes and operating metrics, and have driven these processes down through the operating management structure in every region, which we believe differentiates us from many of our competitors. This allows us to offer our customers in all of our geographic regions discrete, comprehensive and differentiated services that leverage both the technical expertise of our skilled engineers and our in-house R&D team.

Recent Trends and Outlook

Demand for services in the oil and natural gas industry is cyclical and subject to sudden and significant volatility. Market demand for our services is experiencing a recovery from the lows of the last two years that were heavily impacted by COVID-19. The ongoing conflict in Ukraine has contributed to a growing price resurgence for crude oil and is a major factor behind the increased demand for drilling, completion and production activities in 2022.

Also, the impact of COVID-19 on the global economy has lessened significantly in 2022, although recent inflation has put pressure on and is expected to continue to negatively impact global demand.

So far in 2022, West Texas Intermediate (“WTI”) prices have increased by 43.1% from January 1 to June 30 and decreased by 25.8% from July 1 to September 30, however, commodity prices throughout 2022 still remain significantly higher than prices in 2020 and 2021. In response to the rising oil prices and as a response to the energy crisis resulting from the ongoing conflict in Ukraine, the United States has continued to increase drilling and completion activity levels. As of September 30, 2022, U.S. rig count was up to 765, an increase of 30.5% since December 31, 2021, according to a report from Baker Hughes.

As noted above, commodity prices have recently declined slightly from the highs experienced in the second quarter and the demand for commodities could decline further due to, among other things, uncertainty and volatility arising from the ongoing conflict in Ukraine, release of sanctions on Russia, increasing inflation and government efforts to reduce inflation, speculation as to future actions by OPEC+, a widespread resurgence of COVID-19, higher gas prices, or possible changes in the overall health of the global economy, including a prolonged recession. Although current forward strip for commodity prices indicate expectations of relatively high commodity prices over the next twelve months or longer, the current commodity price environment remains uncertain and the extent to which commodity prices and our operating and financial results of future periods will be impacted by the above-mentioned factors will depend largely on future developments, which are highly uncertain and cannot be accurately predicted.

During the quarter ended September 30, 2022, the Producer Price Index as measured by the Bureau of Labor Statistics decreased by 0.2%. In spite of this decrease in the third quarter of 2022, we have experienced higher costs for goods used in providing services to our customers. In addition, we face increased competition for labor, as turnover in the industry is still fairly high. We are spending more to attract and retain employees in the field, especially as we plan for continued growth for the remainder of this fiscal year. At the same time, we have seen increased demand for our services, which has allowed us to implement price increases with our customers across all regions.

The Company remains focused on providing the highest level of customer service across our regions and different service offerings, which has allowed us to make meaningful positive impacts to our revenue, operating margins, Adjusted EBITDA and cash flows. We are taking steps to hire essential personnel and increase capital expenditures as activity rebounds, but we are measured in our growth and focused on returns.

We believe our diverse product and service offerings uniquely position KLXE to respond to a rapidly evolving marketplace where we can provide a comprehensive suite of engineered solutions for our customers with one call and one master services agreement.

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How We Generate Revenue and the Costs of Conducting Our Business

Our business strategy seeks to generate attractive returns on capital by providing differentiated services and prudently applying our cash flows to select targeted opportunities, with the potential to deliver high returns that we believe offer superior margins over the long-term. Our services generally require equipment that is less expensive to maintain and is operated by a smaller staff than many other oilfield service providers. As part of our returns-focused approach to capital spending, we are focused on efficiently utilizing capital to develop new products. We support our existing asset base with targeted investments in R&D, which we believe allows us to maintain a technical advantage over our competitors providing similar services using standard equipment.

Demand for services in the oil and natural gas industry is cyclical and subject to sudden and significant volatility. We remain focused on serving the needs of our customers by providing a broad portfolio of product service lines across the major basins, while maintaining sufficient operating liquidity and prudently managing our capital expenditures.

We believe we have strong management systems in place, which will allow us to manage our operating resources and associated expenses relative to market conditions. Historically, we believe our services have generated margins superior to our competitors based upon the differential quality of our performance, and that these margins would contribute to future cash flow generation. The required investment in our business includes both working capital (principally for accounts receivable, inventory and accounts payable growth tied to increasing activity and revenues) and capital expenditures for both maintenance of existing assets and ultimately growth when economic returns justify the spending.

How We Evaluate Our Operations

Key Financial Performance Indicators
We recognize the highly cyclical nature of our business and the need for metrics to (1) best measure the trends in our operations and (2) provide baselines and targets to assess the performance of our managers.

The measures we believe most effective to achieve the above stated goals include:

Revenue
Adjusted Earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”): Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. Adjusted EBITDA is not a measure of net earnings or cash flows as determined by GAAP. We define Adjusted EBITDA as net earnings (loss) before interest, taxes, depreciation and amortization, further adjusted for (i) goodwill and/or long-lived asset impairment charges, (ii) stock-based compensation expense, (iii) restructuring charges, (iv) transaction and integration costs related to acquisitions and (v) other expenses or charges to exclude certain items that we believe are not reflective of ongoing performance of our business.
Adjusted EBITDA Margin: Adjusted EBITDA Margin is defined as Adjusted EBITDA, as defined above, as a percentage of revenue.
We believe Adjusted EBITDA is useful because it allows us to supplement the GAAP measures in order to evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above in arriving at Adjusted EBITDA (Loss) because these amounts can vary substantially from company to company within our industry depending upon accounting methods, book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net (loss) earnings as determined in accordance with GAAP, or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax
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structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
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Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended October 31, 2021

Revenue. The following is a summary of revenue by segment:
Three Months Ended
September 30, 2022October 31, 2021% Change
Revenue:
     Rocky Mountains$66.5 $36.5 82.2 %
     Southwest68.5 45.8 49.6 %
     Northeast/Mid-Con86.6 56.7 52.7 %
Total revenue$221.6