klxe_Current Folio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

For The Quarterly Period Ended April 30, 2019

 

Commission File No. 001-38609

 

 

KLX ENERGY SERVICES HOLDINGS, INC.

 

(Exact name of registrant as specified in its charter)

 

 

 

 

DELAWARE

36-4904146

(State of Incorporation)

(I.R.S. Employer Identification No.)

 

1300 Corporate Center Way

Wellington, Florida 33414

(Address of principal executive offices)

 

(561) 383-5100

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 Par Value

 

KLXE

 

The 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 [X] 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 [X] NO [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filer [  ] Accelerated filer [X] Non-accelerated filer [  ] Smaller reporting company [  ] Emerging growth company [X]

 

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 [X]

 

The registrant has one class of common stock, $0.01 par value, of which 23,149,044 shares were outstanding as of May 20, 2019.

 

 

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KLX ENERGY SERVICES HOLDINGS, INC.

 

Form 10-Q for the Quarter Ended April 30, 2019

 

Table of Contents

 

 

 

 

 

 

 

 

 

Page

Part I 

Financial Information

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of April 30, 2019 and January 31, 2019

3

 

 

 

 

Condensed Consolidated Statements of (Loss) Earnings for the Three Months Ended April 30, 2019 and 2018

4

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended April 30, 2019 and 2018

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2019 and 2018

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4. 

Controls and Procedures

29

 

 

 

Part II 

Other Information

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 6. 

Exhibits

31

 

 

 

Signatures 

32

 

 

 

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PART 1 – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

KLX ENERGY SERVICES HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In millions, other than per share amounts)

 

 

 

 

 

 

 

 

 

 

 

APRIL 30, 

 

JANUARY 31, 

 

 

    

2019

    

2019

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

110.6

 

$

163.8

 

Accounts receivable–trade, less allowance for doubtful accounts ($4.0 at April 30, 2019 and $3.1 at January 31, 2019)

 

 

138.9

 

 

119.6

 

Inventories, net

 

 

18.4

 

 

15.4

 

Other current assets

 

 

9.3

 

 

9.5

 

Total current assets

 

 

277.2

 

 

308.3

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation ($164.9 at April 30, 2019 and $152.7 at January 31, 2019)

 

 

313.1

 

 

271.9

 

Goodwill

 

 

73.6

 

 

43.2

 

Identifiable intangible assets, net

 

 

49.5

 

 

30.3

 

Other assets

 

 

18.7

 

 

19.1

 

 

 

$

732.1

 

$

672.8

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

47.0

 

$

47.3

 

Accrued interest

 

 

14.4

 

 

7.2

 

Accrued liabilities

 

 

28.9

 

 

30.7

 

Total current liabilities

 

 

90.3

 

 

85.2

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

242.3

 

 

242.2

 

Deferred income taxes

 

 

6.7

 

 

 —

 

Other non-current liabilities

 

 

5.6

 

 

4.7

 

 

 

 

 

 

 

 

 

Commitments, contingencies and off-balance sheet arrangements (Note 10)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share; 110.0 shares authorized; 23.1 shares issued as of April 30, 2019 and 22.6 shares issued as of January 31, 2019

 

 

0.2

 

 

0.2

 

Additional paid-in capital

 

 

397.9

 

 

345.0

 

Treasury stock: 0.1 shares as of April 30, 2019 and 0 shares as of January 31, 2019

 

 

(1.4)

 

 

 —

 

Accumulated deficit

 

 

(9.5)

 

 

(4.5)

 

Total stockholders’ equity

 

 

387.2

 

 

340.7

 

 

 

$

732.1

 

$

672.8

 

 

See accompanying notes to condensed consolidated financial statements.

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KLX ENERGY SERVICES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS (UNAUDITED)

(In millions, other than per share amounts)

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

APRIL 30, 

 

APRIL 30, 

 

 

    

2019

 

2018

 

Service revenues

 

$

145.8

 

$

110.3

 

Cost of sales

 

 

118.9

 

 

82.0

 

Selling, general and administrative

 

 

23.8

 

 

21.8

 

Research and development costs

 

 

0.7

 

 

0.7

 

Operating earnings

 

 

2.4

 

 

5.8

 

Interest expense, net

 

 

7.1

 

 

 -

 

(Loss) earnings before income taxes

 

 

(4.7)

 

 

5.8

 

Income tax expense

 

 

0.3

 

 

 -

 

Net (loss) earnings

 

$

(5.0)

 

$

5.8

 

 

 

 

 

 

 

 

 

Net (loss) earnings per share - basic

 

$

(0.24)

 

$

0.29

 

Net (loss) earnings per share - diluted

 

$

(0.24)

 

$

0.29

 

 

See accompanying notes to condensed consolidated financial statements.

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KLX ENERGY SERVICES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED APRIL 30, 2019 AND 2018

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Treasury

 

Accumulated

 

Stockholders’

 

 

    

Shares

    

Amount

    

Capital

    

Stock

    

Deficit

    

Equity

 

Balance, January 31, 2019

 

22.6

 

$

0.2

 

$

345.0

 

$

 —

 

$

(4.5)

 

$

340.7

 

Restricted stock grants, net of forfeitures and restricted stock unit vesting

 

 —

 

 

 —

 

 

4.4

 

 

 —

 

 

 —

 

 

4.4

 

Issuance of shares as a component of Tecton acquisition price

 

0.5

 

 

 —

 

 

12.1

 

 

 —

 

 

 —

 

 

12.1

 

Shares reserved as a component of Red Bone acquisition price

 

 —

 

 

 —

 

 

36.4

 

 

 —

 

 

 —

 

 

36.4

 

Escrowed shares related to Tecton acquisition

 

 —

 

 

 —

 

 

 —

 

 

(1.4)

 

 

 —

 

 

(1.4)

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5.0)

 

 

(5.0)

 

Balance, April 30, 2019

 

23.1

 

$

0.2

 

$

397.9

 

$

(1.4)

 

$

(9.5)

 

$

387.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Former

 

 

 

 

 

 

 

 

 

Parent

 

Accumulated

 

Total

 

 

 

Company

 

Earnings

 

Stockholders’

 

 

    

Investment

    

(Deficit)

    

Equity

 

Balance, January 31, 2018

 

$

1,025.8

 

$

(801.2)

 

$

224.6

 

Net earnings

 

 

 —

 

 

5.8

 

 

5.8

 

Net transfers from Former Parent

 

 

16.5

 

 

 —

 

 

16.5

 

Balance, April 30, 2018

 

$

1,042.3

 

$

(795.4)

 

$

246.9

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

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KLX ENERGY SERVICES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In millions)

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

APRIL 30, 

 

APRIL 30, 

 

 

    

2019

    

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

 

Net (loss) earnings

 

$

(5.0)

 

$

5.8

 

Adjustments to reconcile net (loss) earnings to net cash flows provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14.8

 

 

8.8

 

Non-cash compensation

 

 

4.5

 

 

2.6

 

Amortization of deferred financing fees

 

 

0.3

 

 

 —

 

Provision for inventory reserve

 

 

0.1

 

 

0.1

 

Change in allowance for doubtful accounts

 

 

0.9

 

 

0.3

 

Loss on disposal of property, equipment and other

 

 

0.8

 

 

0.2

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(10.6)

 

 

(14.1)

 

Inventories

 

 

(0.3)

 

 

(0.9)

 

Other current and non-current assets

 

 

(0.8)

 

 

(2.7)

 

Accounts payable

 

 

(3.8)

 

 

6.7

 

Other current and non-current liabilities

 

 

3.3

 

 

(1.6)

 

Net cash flows provided by operating activities

 

 

4.2

 

 

5.2

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(29.6)

 

 

(19.6)

 

Proceeds from sale of assets

 

 

0.1

 

 

0.5

 

Acquisitions, net of cash acquired

 

 

(27.9)

 

 

 —

 

Net cash flows used in investing activities

 

 

(57.4)

 

 

(19.1)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net transfers from Former Parent (pre spin-off)

 

 

 —

 

 

13.9

 

Net cash flows provided by financing activities

 

 

 —

 

 

13.9

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(53.2)

 

 

 —

 

Cash and cash equivalents, beginning of period

 

 

163.8

 

 

 —

 

Cash and cash equivalents, end of period

 

$

110.6

 

$

 —

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

 

Change in deposits on capital expenditures

 

$

(1.4)

 

$

 —

 

Interest

 

 

0.1

 

 

 —

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

10.1

 

$

1.9

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

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KLX ENERGY SERVICES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited – In millions)

 

Note 1.Description of Business and Basis of Presentation

 

Description of Business

 

On September 14, 2018, KLX Inc. (the “Former Parent” or “KLX”) created an independent, publicly-traded company through a spin-off of its Energy Services Group business to Former Parent’s stockholders (the “Spin-Off”).  As a result of the Spin-Off, KLX Energy Services Holdings, Inc. (the “Company” or “KLX Energy Services”) now operates as an independent, publicly-traded company. The April 30, 2018 basic and diluted earnings per common share and the average number of common shares outstanding were calculated using the number of KLX Energy Services common shares outstanding immediately following the Spin-Off.

 

The Company is a provider of completion, intervention and production services and products to the major onshore oil and gas producing regions of the United States.

 

Basis of Presentation

 

Prior to the Spin-Off on September 14, 2018, the Company’s unaudited condensed financial statements were derived from the Former Parent’s condensed consolidated financial statements and accounting records as if it was operated on a stand-alone basis and were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All intercompany transactions and account balances within the Company have been eliminated.

 

The condensed consolidated statements of (loss) earnings for periods prior to the Spin-Off reflect allocations of general corporate expenses from the Former Parent, including, but not limited to, executive management, finance, legal, information technology, human resources, employee benefits administration, treasury, risk management, procurement and other shared services. The allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenues generated, costs incurred, headcount or other measures. Management of the Company considers these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, the Company. The allocations may not, however, reflect the expense the Company would have incurred as a stand-alone company for the periods presented. Actual costs that may have been incurred if the Company had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.

 

Former Parent Company Investment – Former Parent company investment in the condensed consolidated statement of stockholders’ equity for the three months ended April 30, 2018 represents Former Parent’s historical investment in the Company, the net effect of cost allocations from transactions with Former Parent and net transfers of cash and assets from Former Parent. See Note 6 for a further description of the transactions between the Company and Former Parent.

 

Financial Statement Preparation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. 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 or for any future period.

 

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Note 2.Recent Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-01, Business Combinations. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of ASU 2017-01 did not have a material impact on the Company’s condensed consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments related to how certain cash receipts and payments are presented and classified in the statement of cash flows. These cash flow issues include debt prepayment or extinguishment costs, settlement of zero-coupon debt, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted, and should be applied retrospectively. The Company does not expect a material impact upon adoption of this ASU to its condensed consolidated financial statements as the Company’s condensed consolidated statements of cash flows are not impacted by the eight issues listed above.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation—Stock Compensation. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including that excess tax benefits and shortfalls be recorded as income tax benefit or expense in the statement of earnings, rather than equity, and requires excess tax benefits from stock-based compensation to be classified in cash flows from operations. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which supersedes ASC Topic 840, Leases, and creates a new topic, ASC Topic 842, Leases. This update is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Earlier adoption is permitted. ASU 2016-02 requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect of this update on its condensed consolidated financial statements.

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, which updated the guidance in ASC Topic 606, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB deferred the effective date for implementation of ASU 2014-09 by one year and during 2016, the FASB issued various related accounting standard updates, which clarified revenue accounting principles and provided supplemental adoption guidance. The guidance under ASU 2014-09 is

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effective for fiscal years beginning after December 15, 2018 and interim periods within annual reporting periods beginning after December 15, 2019. To assess the impact of this guidance, the Company established a cross functional implementation project team, inventoried its revenue streams and contracts with customers and applied the principles of the guidance against a selection of contracts to assist in the determination of potential revenue accounting differences. No individually significant implementation matters were identified, and revenue will be recognized on a “point-in-time” basis for product revenues and over time for service revenues under the new standard, which is consistent with current practice. The Company implemented internal controls, policies and processes to comply with the new standard. The Company adopted ASC Topic 606 in the first quarter of fiscal 2019 using the modified retrospective method of adoption, which resulted in no changes to the opening balance sheet as of February 1, 2019. Prior period statements of (loss) earnings will remain unchanged.

 

Note 3.Business Combinations

 

On November 5, 2018, the Company acquired Motley Services, LLC (“Motley”), a premier provider of well completion and intervention services for complex, long lateral, horizontal wells, for $140.0 in cash (net of cash acquired) and $9.0 of shares of the Company’s common stock payable to certain employees of Motley. Based on the Company’s preliminary purchase price allocation, the excess of the purchase price over the fair value of the identifiable assets acquired approximated $71.5, of which $28.3 was allocated to identifiable intangible assets consisting of customer contracts and relationships and covenants not to compete, and $43.2 is included in goodwill. The useful life assigned to the customer contracts and relationships is 20 years, and the covenants not to compete are being amortized over their contractual periods of three years.

 

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. On March 19, 2019, the Company acquired Red Bone Services LLC (“Red Bone”), a premier provider of oilfield services primarily in the Mid-Continent, providing fishing, non-frac high pressure pumping, thru-tubing and certain other services. The aggregate acquisition price of the acquisitions was approximately $75.0, comprised of approximately $47.0 in shares of the Company’s common stock issuable over time at a fixed price and approximately $28.0 in cash to the sellers and for the retirement of debt. The Company issued shares in a subsidiary company to effect the Red Bone acquisition, which become exchangeable for KLXE common stock over specified dates between the acquisition date and September 19, 2021. The Company issued shares in its common stock to effect the Tecton acquisition, a portion of which is not included in purchase consideration as the shares were escrowed and held as treasury stock to satisfy identified future tax obligations through cancellation of the shares. The shares issued to the sellers of Tecton and Red Bone are subject to restrictions on public re-sale from a minimum of six months to a maximum of 24 months, subject to acceleration upon the occurrence of certain events.

 

Based on the Company’s preliminary purchase price allocation, the excess of the purchase price over the fair value of the identifiable assets acquired approximated $50.4, of which $20.0 was allocated to identifiable intangible assets consisting of customer contracts and relationships and covenants not to compete and $30.4 is included in goodwill. The useful life assigned to the customer contracts and relationships is 20 years, and the covenants not to compete are being amortized over their contractual periods of 18 months and three years for Tecton and Red Bone, respectively.

 

The Motley, Tecton and Red Bone acquisitions were accounted for as purchases under FASB ASC 805, Business Combinations (“ASC 805”). The assets purchased and liabilities assumed have been reflected, as of the respective dates of acquisition, in the accompanying condensed consolidated balance sheet as of April 30, 2019 and January 31, 2019. The results of operations for the Motley, Tecton and Red Bone acquisitions are included in the accompanying condensed consolidated statements of (loss) earnings from the respective dates of acquisition. The valuation of certain assets, principally intangible assets including goodwill and identified intangible assets related to the acquisitions, is not yet complete, and as such, the Company has not yet finalized its allocation of the purchase price for the acquisitions.

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The following table summarizes the current estimates of fair values of assets acquired and liabilities assumed in the Motley, Tecton and Red Bone acquisitions in accordance with ASC 805, which are currently recorded based on management’s estimates as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Motley

 

Tecton

 

Red Bone

 

Accounts receivable-trade

 

$

23.3

 

$

2.1

 

$

7.5

 

Inventories

 

 

 -

 

 

 -

 

 

2.7

 

Other current and non-current assets

 

 

9.3

 

 

0.1

 

 

0.1

 

Property and equipment

 

 

56.3

 

 

6.2

 

 

19.3

 

Goodwill

 

 

43.2

 

 

11.3

 

 

19.1

 

Identified intangibles

 

 

28.3

 

 

6.0

 

 

14.0

 

Accounts payable

 

 

(6.0)

 

 

(0.7)

 

 

(3.3)

 

Accrued liabilities

 

 

(5.4)

 

 

(2.1)

 

 

(0.7)

 

Other current and non-current liabilities

 

 

 -

 

 

 -

 

 

(6.7)

 

Total consideration paid

 

$

149.0

 

$

22.9

 

$

52.0

 

 

The majority of goodwill and intangible assets for Motley are expected to be deductible for tax purposes. The majority of goodwill and intangible assets for Tecton and Red Bone are not expected to be deductible for tax purposes.

 

The Company has substantially integrated Motley and, as a result, it is not practicable to report stand-alone revenues and operating earnings of the acquired business since the acquisition date. The amount of Tecton and Red Bone revenues included in the Company’s results was approximately $8.9 for the three months ended April 30, 2019. It is not practicable to report stand-alone operating earnings of Tecton and Red Bone since the acquisition date.

 

On a pro forma basis to give effect to the Motley, Tecton and Red Bone acquisitions, as if they occurred on February 1, 2018, revenues, net (loss) earnings and (loss) earnings per diluted share for the three months ended April 30, 2019 and 2018 would have been as follows:

 

 

 

 

 

 

 

 

 

 

 

UNAUDITED

 

 

 

THREE MONTHS ENDED

 

 

 

April 30, 2019

 

April 30, 2018

 

 

    

Pro forma

 

Pro forma

  

Revenues

 

$

153.5

 

$

156.8

 

Net (loss) earnings

 

 

(4.5)

 

 

6.0

 

(Loss) earnings per diluted share

 

 

(0.20)

 

 

0.27

 

 

 

Note 4.Property and Equipment, Net

 

Property and equipment consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

    

Useful

    

April 30, 

    

January 31, 

 

 

Life (Years)

 

2019

 

2019

Land, buildings and improvements

 

 

1 - 40

 

$

32.6

 

$

32.3

Machinery

 

 

1 - 20

 

 

224.1

 

 

202.2

Furniture and equipment

 

 

1 - 10

 

 

221.3

 

 

190.1

 

 

 

  

 

 

478.0

 

 

424.6

Less accumulated depreciation

 

 

  

 

 

164.9

 

 

152.7

 

 

 

  

 

$

313.1

 

$

271.9

 

Depreciation expense was $14.0 and $8.8 for the three months ended April 30, 2019 and 2018, respectively.

 

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Note 5.Goodwill and Long-Lived Assets, Net

 

The following sets forth the intangible assets by major asset class, all of which were acquired through business purchase transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30, 2019

 

January 31, 2019

 

 

Useful Life

 

Original

 

Accumulated

 

Net Book

 

Original

 

Accumulated

 

Net Book

 

 

(Years)

 

Cost

 

Amortization

 

Value

 

Cost

 

Amortization

  

Value

Customer contracts and relationships

 

20

 

$

42.8

 

$

0.6

 

$

42.2

 

$

24.9

 

$

0.3

 

$

24.6

Covenants not to compete

 

1.5 - 3

 

 

5.5

 

 

0.7

 

 

4.8

 

 

3.4

 

 

0.3

 

 

3.1

Developed technologies

 

15

 

 

3.3

 

 

0.8

 

 

2.5

 

 

3.3

 

 

0.7

 

 

2.6

 

 

 

 

 

 

$

51.6

 

$

2.1

 

$

49.5

 

$

31.6

 

$

1.3

 

$

30.3

 

Amortization expense of intangible assets was $0.8 and $0 for the three months ended April 30, 2019 and 2018, respectively. The Company currently expects to recognize amortization expense related to intangible assets of approximately $4.0 in each of the next five fiscal years. The future amortization amounts are estimates. Actual future amortization expense may be different due to future acquisitions, impairments, changes in amortization periods or other factors.

 

Goodwill increased $30.4 as compared to January 31, 2019, as a result of the acquisitions of Tecton and Red Bone.

 

Note 6.Related Party Transactions

 

The condensed consolidated statements of (loss) earnings for the three months ended April 30, 2018 include an allocation of general corporate expenses from KLX. These costs were allocated to the Company on a systematic and reasonable basis utilizing a direct usage basis when identifiable, with the remainder allocated on the basis of revenue generated, costs incurred, headcount or other measures.

 

Allocations for general corporate expenses, including management costs and corporate support services provided to the Company, totaled $7.7 for the three months ended April 30, 2018 and were reported in the Company’s selling, general and administrative expenses on its condensed consolidated statements of (loss) earnings. These amounts include costs for allocations related to Former Parent’s strategic alternatives review process in the first quarter of Fiscal 2018, as well as for functions including executive management, finance, legal, information technology, human resources, employee benefits administration, treasury, risk management, procurement and other shared services.

 

In connection with the consummation of the Spin-Off, KLX Energy Services entered into a number of agreements with KLX, including a transition services agreement, distribution agreement, an employee matters agreement and an Intellectual Property (“IP”) matters agreement. These agreements govern the relationship between us and KLX and provide for the allocation between us and KLX of various assets, liabilities and obligations (including employee benefits, information technology and insurance). All services under the transition services agreement with Former Parent were terminated in the prior fiscal year.

 

Note 7.Accrued Liabilities

 

Accrued liabilities consist of the following:

 

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April 30, 

 

January 31, 

 

 

    

2019

    

2019

 

Accrued salaries, vacation and related benefits

 

$

19.1

 

$

13.9

 

Accrued incentive compensation

 

 

0.8

 

 

9.1

 

Accrued property taxes

 

 

1.8

 

 

1.9

 

Other accrued liabilities

 

 

7.2

 

 

5.8

 

 

 

$

28.9

 

$

30.7

 

 

 

Note 8.Long-Term Debt

 

As of April 30, 2019, 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 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 the debt issue costs for the Notes, total debt as of April 30, 2019 was $242.3.

 

As of April 30, 2019, the Company also had a $100.0 asset-based revolving credit facility pursuant to a senior secured credit agreement dated August 10, 2018 (the “ABL Facility”). The ABL Facility became effective on September 14, 2018, the date of the Spin-Off, and matures in September 2023. On October 22, 2018, the ABL Facility was amended primarily to permit the Company to issue the Notes and acquire Motley and the definition of the required ratio (as defined in the ABL Facility) was also amended as a result of the Notes issuance.

 

Borrowings under the ABL Facility bear interest at a rate equal to the London interbank offered rate plus the applicable margin (as defined in the ABL Facility). No amounts were outstanding under the ABL Facility as of April 30, 2019.

 

The ABL Facility is tied to a borrowing base formula and has no maintenance financial covenants. The ABL Facility is secured by, among other things, a first priority lien on our accounts receivable and inventory and contains customary conditions precedent to borrowing and affirmative and negative covenants, all of which were met as of April 30, 2019.

 

Letters of credit issued under the ABL Facility aggregated $0.8 at April 30, 2019.

 

Note 9.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.

 

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 no debt outstanding under the ABL Facility as of April 30, 2019. The fair value of the Company’s Notes, based on market prices for publicly-traded debt (which the Company classifies as Level 2 inputs), was $262.5 and $254.1 as of April 30, 2019 and January 31, 2019, respectively.

 

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Note 10.Commitments, Contingencies and Off-Balance-Sheet Arrangements

 

Lease Commitments – The Company finances its use of certain facilities and equipment under committed lease arrangements provided by various institutions. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on the condensed consolidated balance sheets. At April 30, 2019, future minimum lease payments under these arrangements approximated $51.8, of which $26.7 is related to long-term real estate leases.

 

Litigation – The Company is 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.

 

Indemnities, Commitments and Guarantees – During its normal 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 and 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 11.Accounting for Stock-Based Compensation

 

The Company has a Long-Term Incentive Plan (“LTIP”) under which its 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 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.

 

Compensation cost recognized during the three months ended April 30, 2019 and 2018 primarily related to grants of restricted stock and restricted stock units granted or approved by our Compensation Committee and Former Parent, respectively. As a result, share based compensation was $4.4 and $2.6 for the three months ended April 30, 2019 and 2018, respectively. Unrecognized compensation cost related to restricted stock awards made by the Company was $60.8 at April 30, 2019.

 

The Company has established a qualified Employee Stock Purchase Plan, the terms of which allow for qualified employees (as defined in the Plan) to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85% of the closing price on the last business day of each semi-annual stock purchase period. The fair value of the employee purchase rights represents the difference between the closing price of the Company’s shares on the date of purchase and the purchase price of the shares. Compensation cost was immaterial for the three months ended April 30, 2018 and relates to the Former Parent’s employee stock purchase plan. The Company’s first option period began on January 1, 2019 and no shares of common stock have been issued to employees under the Plan as of April 30, 2019. Compensation cost was $0.1 for the three months ended April 30, 2019.

 

Note 12.Income Taxes

 

Income tax expense was $0.3 for the three months ended April 30, 2019 and was comprised primarily of state and local taxes, compared to none in the prior year period. Due to the fact the Company has a

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valuation allowance against its deferred tax balances, it was unable to recognize a tax benefit at the federal statutory rate of 21% on its year to date losses. The Company has established a valuation allowance against the majority of its deferred tax balances with a net deferred tax liability remaining related to the Red Bone acquisition.

 

Note 13.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 Southwest (the Permian Basin and the Eagle Ford), the Rocky Mountains (the Bakken, Williston, DJ, Uinta, Powder River, Piceance and Niobrara basins) and the Northeast (the Marcellus and Utica as well as the Mid-Continent STACK and SCOOP and Haynesville). 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”). This group is comprised of the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer. As a result, the CODM has determined the Company has three reportable segments.

 

The following table presents revenues and operating (losses) earnings by reportable segment:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

April 30, 

 

April 30, 

 

    

2019

    

2018

Revenues

 

 

 

 

 

 

Southwest

 

$

58.0

 

$

39.8

Rocky Mountains

 

 

48.6

 

 

40.2

Northeast

 

 

39.2

 

 

30.3

Total revenues

 

 

145.8

 

 

110.3

Operating earnings(1)(2)

 

 

 

 

 

 

Southwest

 

 

(4.0)

 

 

2.1

Rocky Mountains

 

 

2.9

 

 

1.2

Northeast

 

 

3.5

 

 

2.5

Total operating earnings

 

 

2.4

 

 

5.8

Interest expense

 

 

7.1

 

 

 -

(Loss) earnings before income taxes

 

$

(4.7)

 

$

5.8


(1)

Operating (loss) earnings include an allocation of employee benefits and general and administrative costs primarily based on each segment’s percentage of total revenues for the three months ended April 30, 2019 and 2018.

(2)

During the three months ended April 30, 2019, the Company incurred approximately $5.0 of costs associated with transaction and integration related expenses principally associated with recent acquisitions, including the onboarding and training of operating personnel prior to rolling out the new services in additional geographic regions, and during the three months ended April 30, 2018, approximately $3.8 of costs principally associated with KLX’s strategic alternatives review.  

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

April 30, 2019

 

April 30, 2018

 

 

 

Rocky

 

 

 

 

 

 

 

Rocky

 

 

 

 

 

Southwest

 

Mountains

 

Northeast

 

Total

 

Southwest

 

Mountains

 

Northeast

 

Total

Completion revenues

$

40.6

 

$

27.5

 

$

18.3

 

$

86.4

 

$

22.8

 

$

19.2

 

$

15.8

 

$

57.8

Intervention revenues

 

10.2

 

 

10.6

 

 

8.6

 

 

29.4

 

 

10.9

 

 

11.3

 

 

7.9

 

 

30.1

Production revenues

 

7.2

 

 

10.5

 

 

12.3

 

 

30.0

 

 

6.1

 

 

9.7

 

 

6.6

 

 

22.4

Total revenues

$

58.0

 

$

48.6

 

$

39.2

 

$

145.8

 

$

39.8

 

$

40.2

 

$

30.3

 

$

110.3

 

The following table presents capital expenditures by reportable segment:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

April 30, 

    

April 30, 

 

    

2019

    

2018

Southwest

 

$

5.4

 

$

2.8

Rocky Mountains

 

 

11.5

 

 

8.7

Northeast

 

 

12.7

 

 

8.1

 

 

$

29.6

 

$

19.6

 

Capital expenditures for the administrative office and functions have been allocated to the above segments based on each segment’s percentage of total capital expenditures.

 

The following table presents total assets by reportable segment:

 

 

 

 

 

 

 

 

 

 

April 30, 

 

January 31, 

 

    

2019