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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 July 31, 2020
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)
Delaware
36-4904146
(State of Incorporation)
(I.R.S. Employer Identification No.)

1415 Louisiana Street, Suite 2900
Houston, Texas 77002
(832) 518-4094

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

1300 Corporate Center Way
Wellington, Florida 33414
(561) 383-5100

(Former name, former address and former fiscal year, if changed since last report)

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 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 filer
 
 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
 
Smaller 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 8,401,500 shares were outstanding as of September 3, 2020.


2


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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3


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)
(Unaudited)
 
July 31, 2020
 
January 31, 2020
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
98.5

 
$
123.5

Accounts receivable–trade, net of allowance of $5.1 and $12.9
40.5

 
79.2

Inventories, net
26.7

 
12.0

Other current assets
13.8

 
13.8

Total current assets
179.5

 
228.5

Property and equipment, net
234.1

 
306.8

Goodwill

 
28.3

Intangible assets, net
2.6

 
45.8

Other assets
8.9

 
14.0

Total assets
$
425.1

 
$
623.4

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:


 


Accounts payable
$
33.1

 
$
31.4

Accrued interest
7.2

 
7.2

Accrued liabilities
33.8

 
26.2

Total current liabilities
74.1

 
64.8

Long-term debt
243.4

 
243.0

Deferred income taxes
0.1

 

Other non-current liabilities
7.8

 
3.4

Commitments, contingencies and off-balance sheet arrangements

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 110.0 authorized; 8.5 and 5.0 issued (1)
0.1

 
0.1

Additional paid-in capital
468.0

 
416.6

Treasury stock, at cost, 0.1 shares and 0.1 shares (1)
(4.0
)
 
(3.6
)
Accumulated deficit
(364.4
)
 
(100.9
)
Total stockholders’ equity
99.7

 
312.2

Total liabilities and stockholders' equity
$
425.1

 
$
623.4

(1) Common stock and treasury stock were retroactively adjusted for the Company's 1-for-5 Reverse Stock Split effective July 28, 2020. See Note 1.

See accompanying notes to condensed consolidated financial statements.


4


KLX Energy Services Holdings, Inc.
Condensed Consolidated Statements of Operations
(In millions of U.S. dollars, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
July 31, 2020
 
July 31, 2019
 
July 31, 2020
 
July 31, 2019
Revenues
$
36.2

 
$
164.9

 
$
119.2

 
$
310.7

Costs and expenses:
 
 
 
 
 
 
 
   Cost of sales
48.1

 
129.4

 
140.3

 
248.3

   Selling, general and administrative
41.8

 
23.7

 
59.2

 
47.5

   Research and development costs
0.2

 
0.8

 
0.5

 
1.5

   Goodwill and long-lived asset impairment charge

 

 
208.7

 

   Bargain purchase gain
41.1

 

 
41.1

 

Operating (loss) earnings
(12.8
)
 
11.0

 
(248.4
)

13.4

Non-operating expense:
 
 
 
 
 
 
 
   Interest expense, net
7.6

 
7.4

 
15.0

 
14.5

(Loss) earnings before income tax
(20.4
)
 
3.6

 
(263.4
)

(1.1
)
   Income tax expense

 
0.1

 
0.1

 
0.4

Net (loss) earnings
$
(20.4
)
 
$
3.5

 
$
(263.5
)

$
(1.5
)
 
 
 
 
 
 
 
 
Net (loss) earnings per share - basic (1)
$
(4.12
)
 
$
0.78

 
$
(55.00
)
 
$
(0.34
)
Net (loss) earnings per share - diluted (1)
$
(4.12
)
 
$
0.78

 
$
(55.00
)
 
$
(0.34
)
(1) Basic and diluted net (loss) earnings per share were retroactively adjusted for the Company’s 1-for-5 Reverse Stock
Split effective July 28, 2020. See Note 1.

See accompanying notes to condensed consolidated financial statements.

5


KLX Energy Services Holdings, Inc.
Condensed Consolidated Statements of Stockholders' Equity
Three and Six Months Ended July 31, 2020 and 2019
(In millions of U.S. dollars)
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Total Stockholders’ Equity
 
 Shares
 
Amount
 
 
 
 
Balance at January 31, 2020
5.0

 
$
0.1

 
$
416.6

 
$
(3.6
)
 
$
(100.9
)
 
$
312.2

Restricted stock, net of forfeitures

 

 
(0.7
)
 

 

 
(0.7
)
Purchase of treasury stock

 

 

 
(0.3
)
 

 
(0.3
)
Red Bone acquisition price shares reserved
0.1

 

 

 

 

 

Net loss

 

 

 

 
(243.1
)
 
(243.1
)
 Balance at April 30, 2020
5.1


0.1


415.9


(3.9
)

(344.0
)

68.1

Restricted stock, net of forfeitures

 

 
17.4

 
(0.1
)
 

 
17.3

QES acquisition price shares issuance
3.4

 

 
34.7

 

 

 
34.7

Net loss

 

 

 

 
(20.4
)
 
(20.4
)
 Balance at July 31, 2020
8.5

 
$
0.1

 
$
468.0

 
$
(4.0
)
 
$
(364.4
)
 
$
99.7

 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
Balance at January 31, 2019
4.5

 
$

 
$
345.2

 
$

 
$
(4.5
)
 
$
340.7

Restricted stock, net of forfeitures

 

 
4.4

 

 

 
4.4

Tecton acquisition price shares issuance
0.1

 

 
12.1

 

 

 
12.1

Red Bone acquisition price shares reserved

 

 
36.4

 

 

 
36.4

Tecton acquisition shares escrowed

 

 

 
(1.4
)
 

 
(1.4
)
Net loss

 

 

 

 
(5.0
)
 
(5.0
)
Balance at April 30, 2019
4.6




398.1


(1.4
)

(9.5
)

387.2

Sale of stock under employee stock purchase plan

 

 
0.9

 

 

 
0.9

Restricted stock, net of forfeitures

 

 
4.5

 

 

 
4.5

Red Bone acquisition price shares issuance
0.1

 

 

 

 

 

Net earnings

 

 

 

 
3.5

 
3.5

Balance at July 31, 2019
4.7

 
$

 
$
403.5

 
$
(1.4
)
 
$
(6.0
)
 
$
396.1


See accompanying notes to condensed consolidated financial statements.

6


KLX Energy Services Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)

Six Months Ended

July 31, 2020

July 31, 2019
Cash flows from operating activities:





Net loss
$
(263.5
)

$
(1.5
)
Adjustments to reconcile net loss to net cash flows (used in) provided by operating activities
 
 
 
Depreciation and amortization
29.1


31.3

Goodwill and long-lived asset impairment charge
208.7



Non-cash compensation
16.7


9.1

Amortization of deferred financing fees
0.6


0.5

Provision for inventory reserve
1.4


0.7

Change in allowance for doubtful accounts
(7.8
)

1.8

Loss on disposal of property, equipment and other
0.7


1.4

Bargain purchase gain
(41.1
)
 

Changes in operating assets and liabilities:
 
 
 
   Accounts receivable
58.8


(26.5
)
   Inventories
(2.2
)

1.4

   Other current and non-current assets
6.0


0.6

   Accounts payable
(22.2
)

(0.2
)
   Other current and non-current liabilities
(0.7
)

(6.7
)
     Net cash flows (used in) provided by operating activities
(15.5
)

11.9

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(8.5
)

(56.8
)
Proceeds from sale of property and equipment
0.4


0.3

Acquisitions, net of cash acquired
(1.0
)

(27.6
)
     Net cash flows used in investing activities
(9.1
)

(84.1
)
Cash flows from financing activities:
 
 
 
Purchase of treasury stock
(0.4
)


Cash proceeds from stock issuance


0.8

     Net cash flows (used in) provided by financing activities
(0.4
)

0.8

     Net decrease in cash and cash equivalents
(25.0
)

(71.4
)
Cash and cash equivalents, beginning of period
123.5


163.8

Cash and cash equivalents, end of period
$
98.5


$
92.4







Supplemental disclosures of cash flow information:





Cash paid during period for:





Income taxes paid, net of refunds
$
0.3


$
1.0

Interest
14.6


14.7

Supplemental schedule of non-cash activities:





Issuance of common stock and stock based payments for QES acquisition
$
34.7


$

Change in deposits on capital expenditures
(5.4
)

(4.5
)
Accrued capital expenditures
1.2


8.4


See accompanying notes to condensed consolidated financial statements.


7



KLX Energy Services Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited – In millions of U.S. dollars)

NOTE 1 - Description of Business and Basis of Presentation

Description of Business

KLX Energy Services Holdings, Inc. (the “Company”, “KLXE” or “KLX Energy Services”) 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 all of the active major basins throughout the United States. The Company delivers mission critical oilfield services focused on drilling, completion, production and intervention activities for the most technically demanding wells in over 60 service and support facilities located in 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 directional drilling, pressure control, wireline, coiled-tubing, rig-assisted snubbing, fluid pumping, flowback, testing, fishing and well control services. KLXE’s primary rentals and products include hydraulic fracturing stacks, blow out preventers, downhole tools, dissolvable plugs and accommodation units.

On July 24, 2020, the KLXE stockholders approved an amendment to the amended and restated certificate of incorporation of KLXE (the “Reverse Stock Split Amendment”) to effect a reverse stock split of KLXE common stock at a ratio within a range of 1-for-5 and 1-for-10 (the “Reverse Stock Split”), as determined by KLXE’s board of directors (the “Board”). The Board subsequently resolved to implement the Reverse Stock Split at a ratio of 1-for-5.

On July 28, 2020, KLX Energy Services, Krypton Intermediate, LLC, an indirect wholly owned subsidiary of KLXE, Krypton Merger Sub, Inc., an indirect wholly owned subsidiary of KLXE (“Merger Sub”), and Quintana Energy Services Inc. (“QES”), completed the previously announced acquisition of QES, by means of a merger of Merger Sub with and into QES, with QES surviving the merger as a subsidiary of KLXE (the “Merger”). On July 28, 2020, immediately prior to the consummation of the Merger, the Reverse Stock Split Amendment became effective and thereby effectuated the 1-for-5 Reverse Stock Split of the Company’s issued and outstanding common stock.

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 2020 or for any future period. The information included in these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

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.


8


The accompanying unaudited condensed consolidated financial statements present the combined KLXE and QES’s financial position as of July 31, 2020, and includes QES’s results for the final three days of the Company's second fiscal quarter, July 29, 2020 through July 31, 2020.
NOTE 2 - Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. While the exact impact of this standard is not known, the guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.
    
In December 2019, FASB issued ASU 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify aspects of income tax approach for intraperiod tax allocations when there is a loss from continuing operations and income or a gain from other items, and to provide a general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. Topic 740 also provides guidance to simplify how an entity recognizes a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, and evaluations of when step ups in the tax basis of goodwill should be considered part of a business combination. Companies should also reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The guidance is effective for the Company for the fiscal year beginning February 1, 2022. While the exact impact of this standard is not known, the guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (“Topic 230”): Classification of Certain Cash Receipts and Cash Payments, which addresses 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 adoption of ASU 2016-15 did not have a material impact on the Company’s condensed consolidated financial statements as the Company’s condensed consolidated statements of cash flows are not affected by the eight issues listed above.

In June 2016, FASB issued 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 July 31, 2020 had a third-party accounts receivable balance, net of allowance, of $40.5. Topic 326 is not expected to have a material impact on the Company's condensed consolidated balance sheets or its condensed consolidated statements of operations.

In February 2016, FASB issued ASU 2016-02, Leases (“Topic 842”), which supersedes ASC Topic 840, Leases. Topic 842 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

9


and qualitative disclosures surrounding leases. Topic 842 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. In November 2019, FASB deferred the effective date for implementation of Topic 842 by one year and, in June 2020, FASB deferred the effective date by an additional year. The guidance under Topic 842 is effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Earlier adoption is permitted. To assess the impact of this guidance, the Company has established a cross functional implementation project team and is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio under the new standard. The Company is in the process of developing its new accounting policies and determining the potential aggregate impact this guidance is likely to have on its financial statements as of its adoption date.
NOTE 3 - Business Combinations

QES Merger

On July 28, 2020, the Company completed the Merger with QES, a diversified provider of oilfield services to onshore oil and natural gas E&P     companies operating in the United States. The Merger purchase price was approximately $44.4 with cash paid to settle QES debt, comprised of 3.4 shares of the Company’s common stock. Based on the Company’s preliminary purchase price allocation, the purchase price was less than the fair value of the identifiable assets acquired, which resulted in a $41.1 bargain purchase gain being recorded on the condensed consolidated statements of operations for the three and six months ended July 31, 2020. In connection with the closing of the Merger, $9.7 in outstanding borrowings and associated fees and expenses of QES's five-year asset-based revolving credit agreement (the “QES ABL Facility”) were paid off. In addition, the Company assumed certain QES compensation agreements, including restricted stock units ("RSU"), with an estimated fair value of $2.0. Based on the service period related to the period prior to the acquisition date, $0.4 was allocated to the purchase price, and $1.6 relating to post-acquisition services will be recorded as operating expenses over the remaining requisite service periods. RSUs were valued based on the July 28, 2020 grant date.

The Merger was accounted for as a purchase under FASB ASC 805, Business Combinations (“ASC 805”). The results of operations for the acquisition are included in the accompanying condensed consolidated statements of operations from the respective date of acquisition.

The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company's acquisition have been prepared on a preliminary basis with information currently available and are subject to change. The Company expects to finalize its analysis during fiscal 2020. The following table summarizes the fair values of assets acquired and liabilities assumed in the Merger in accordance with ASC 805:
 
QES
Cash
$
8.7

Accounts receivable-trade
12.2

Inventories
14.0

Other current and non-current assets
6.4

Property and equipment
84.0

Accounts payable
(27.2)

Other current and non-current liabilities
(12.6)

Bargain purchase
(41.1)

     Total purchase price (1)
$
44.4

(1) The total consideration transferred of $44.4 includes a cash transfer of $9.7 to pay off a QES ABL Facility.

The amount of QES revenues and operating loss included in the Company's results was approximately $0.7 and $2.2 for both the three and six months ended July 31, 2020, respectively.

Unaudited Supplemental Pro Forma Information


10


The unaudited supplemental pro forma financial information has been provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by combining the companies for the periods presented, or of the results that may be achieved by the combined companies in the future. Further, results may vary significantly from the results reflected in the following unaudited supplemental pro forma financial information because of future events and transactions, as well as other factors. The unaudited supplemental pro forma financial information does not include adjustments to reflect the impact of other cost savings or synergies that may result from the Merger.

On a pro forma basis to give effect to the Merger, as if it occurred on February 1, 2019, revenues, net loss and loss per diluted share for the three and six months ended July 31, 2020 and 2019 would have been as follows:
 
Unaudited Pro Forma
 
Three Months Ended
 
Six Months Ended
 
July 31, 2020
July 31, 2019
 
July 31, 2020
July 31, 2019
Revenues
$
54.5

$
292.5

 
$
212.7

$
572.9

Net loss
54.8

4.4

 
317.8

18.9

Loss per diluted share
6.52

0.56

 
38.76

2.42



2019 Acquisitions

On March 15, 2019, the Company acquired Tecton Energy Services (“Tecton”), a provider of flowback and production testing services, operating primarily in the Rocky Mountains. On March 19, 2019, the Company acquired Red Bone Services LLC (“Red Bone”), a provider of fishing and thru-tubing services in the Mid-Continent. The aggregate acquisition price of the acquisitions was approximately $74.6, comprised of approximately $47.0 in shares of the Company’s common stock issuable over time at a fixed price and approximately $27.6 in cash to the sellers and for the retirement of debt. Based on the Company’s final purchase price allocation, the excess of the purchase price over the fair value of the identifiable assets acquired approximated $51.2, of which $19.4 was allocated to identifiable intangible assets consisting of customer contracts and relationships and covenants not to compete, and $31.8 was allocated to goodwill. The useful life assigned to the customer contracts and relationships is 10 years, and the covenants not to compete are being amortized over their contractual periods of 1.5 - 3 years for Tecton and Red Bone.

The Tecton and Red Bone acquisitions were accounted for as purchases under ASC 805. The results of operations for the acquisitions are included in the accompanying condensed consolidated statements of operations from the respective dates of acquisition. The following table summarizes the fair values of assets acquired and liabilities assumed in the Tecton and Red Bone acquisitions in accordance with ASC 805:
 
 
Tecton
 
Red Bone
Accounts receivable-trade
 
$
2.1

 
$
7.2

Inventories
 

 
2.7
Other current and non-current assets
 
0.2
 

Property and equipment
 
2.8
 
23.6
Goodwill
 
15.0
 
16.8
Identified intangibles
 
6.2
 
13.2
Accounts payable and accrued liabilities
 
(2.1)
 
(4.2)
Other current and non-current liabilities
 
(1.6)
 
(7.3)
     Total consideration paid
 
$
22.6

 
$
52.0



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 Red Bone 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 revenues included in the Company’s results was approximately $6.0 and $9.1 for the three and six months ended

11


July 31, 2019, respectively. It is not practicable to report stand-alone operating earnings of Tecton since the acquisition date.

On a pro forma basis to give effect to the Tecton and Red Bone acquisitions, as if they occurred on February 1, 2019, revenues, net earnings (loss) and earnings (loss) per diluted share for the three and six months ended July 31, 2019 would have been as follows:
 
Unaudited Pro Forma
 
Three Months Ended
 
Six Months Ended
 
July 31, 2019
 
July 31, 2019
Revenues
$
164.9

 
$
318.4

Net earnings (loss)
3.5

 
(1.0)
Earnings (loss) per diluted share
0.16

 
(0.05)

NOTE 4 - Inventories
Inventories consisted of the following:
 
 
July 31, 2020
 
January 31, 2020
Supplies
 
$
14.3

 
$
5.6

Plugs
 
6.4

 
6.1

Consumables
 
6.2

 
1.0

Work-in-progress
 

 
0.2

Other
 
2.3

 
0.6

Total inventories
 
$
29.2

 
$
13.5



Inventories, which consist of finished goods, primarily include packers, plugs and other consumables used to perform services for customers. The Company values inventories at the lower of cost or net realizable value. Inventory reserves were approximately $2.5 and $1.5 as of July 31, 2020 and January 31, 2020, respectively.
NOTE 5 - Property and Equipment, Net

Property and equipment consisted of the following:
 
Useful Life (Years)
 
July 31, 2020
 
January 31, 2020
Land, buildings and improvements
1
40
 
$
44.0

 
$
38.2

Machinery
1
20
 
229.4
 
257.9
Furniture and equipment
1
15
 
178.5
 
216.7
   Total property and equipment
 
 
 
 
451.9

512.8
Less accumulated depreciation
 
 
 
 
217.8
 
206.0
   Property and equipment, net
 
 
 
 
$
234.1


$
306.8



Depreciation expense was $10.1 and $15.4 for the three months ended July 31, 2020 and 2019, respectively and $25.3 and $29.4 for the six months ended July 31, 2020 and 2019, respectively.

Assets Held for Sale

As of July 31, 2020, the Company's condensed consolidated balance sheet includes assets classified as held for sale of $3.5. The assets held for sale are reported within other current assets on the condensed consolidated balance sheet and represent the value of two operational facilities. In light of the current market environment, the Company has consolidated operations within certain geographies rendering these locations unnecessary to support the efficient operations of the Company. These assets are being actively marketed for sale as of July 31, 2020 and are recorded at the lower of their carrying value or fair value less costs to sell.

12


NOTE 6 - Goodwill and Intangible Assets, Net

The following sets forth the intangible assets by major asset class, all of which were acquired through business purchase transactions:
 
 
 
July 31, 2020
 
January 31, 2020
 
Useful Life (Years)
 
Original Cost
 
Accumulated Amortization
 
Net Book Value
 
Original
Cost
 
Accumulated Amortization
 
Net Book Value
Customer contracts and relationships (1)
10
 
$
5.7

 
$
3.1

 
$
2.6

 
$
43.0

 
$
2.4

 
$
40.6

Covenants not to compete
1.5 - 3
 
0.5

 
0.5

 

 
4.7

 
1.9

 
2.8

Developed technologies
15
 

 

 

 
3.3

 
0.9

 
2.4

     Total intangible assets
 
 
$
6.2


$
3.6


$
2.6


$
51.0


$
5.2


$
45.8

(1) The customer contracts and relationships intangible asset's useful life was reduced from 20 to 10 years as of July 31,
2020.

Amortization expense associated with intangible assets was $2.8 and $1.1 for the three months ended July 31, 2020 and 2019, respectively, and $3.8 and $1.9 for the six months ended July 31, 2020 and 2019, respectively. Due to the accelerated amortization of intangible assets, the Company does not expect to recognize future material amortization expense related to intangible assets. During the three months ended July 31, 2020, accelerated amortization of $2.7 was recognized related to the Company's customer contracts and relationships long-lived intangible. Actual future amortization expense may be different due to future acquisitions, impairments, changes in amortization periods or other factors.

Goodwill and indefinite life intangible assets are tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. The oilfield service industry experienced an abrupt deterioration in demand during the second half of 2019, which has continued into 2020. During the first quarter of 2020, the novel coronavirus ("COVID-19") pandemic emerged and applied significant downward pressure on the global economy and oil demand and prices, leading North American operators to announce significant cuts to planned 2020 capital expenditures. The combination of the COVID-19 pandemic and supply concerns has driven a steep drop in oil prices, leading to decreases in demand for the Company's services and lower current and expected revenues for the Company.

Based on the impairment indicators above, the Company performed a long-lived asset impairment analysis during the three months ended April 30, 2020, and concluded that the carrying amount of the long-lived assets exceeded the relative fair values of two of the reporting units asset groups. As a result, the Company recorded a $180.4 long-lived asset impairment charge, $39.2 related to identified intangible assets and $141.2 related to property and equipment, which is included in the condensed consolidated statements of operations for the six months ended July 31, 2020. This charge reflects $91.3 and $89.1 of the long-lived assets attributable to the Southwest and Northeast/Mid-Con segments, respectively.

Determining fair value requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating profit margins, weighted average cost of capital, terminal growth rates, future market share and future market conditions, among others. The Company's cash flow projections were a significant input into the April 30, 2020 fair values. See Note 9 for additional information regarding the fair value determination. If the Company continues to be unable to achieve projected results or long-term projections are adjusted downward, it could negatively impact future valuations of the Company’s long-lived assets.

The valuation of the Company and its reportable segments’ goodwill impairment test was estimated using the guideline public company analysis and the discounted cash flow analysis, which were equally weighted in the fair value analysis. See Note 9 for additional information regarding the fair value determination. The results of the goodwill impairment test as of April 30, 2020 indicated that goodwill was impaired because the carrying value of the Rocky Mountains reporting unit exceeded its relative fair value. Accordingly, the Company recorded a $28.3 goodwill impairment charge, which is included in the condensed consolidated statements of operations

13


for the six months ended July 31, 2020. This charge reflects the full value of the goodwill attributable to the Rocky Mountains segment, leaving the Company with no goodwill as of July 31, 2020. No additional goodwill impairment tests were performed in the second quarter of 2020 because the full value of goodwill was impaired during the first quarter.

During the second quarter 2020, review of the customer relationship intangible assets, an analysis of the future contributions to revenue from these customers resulted in forecast declines of approximately 50%. As a result of our review, we recognized a charge of $2.7 reflecting accelerated amortization to reduce the carrying value of our customer relationships intangible was recorded. The accelerated amortization charge is included in the condensed consolidated statements of operations for the three and six months ended July 31, 2020.
NOTE 7 - Accrued Liabilities

Accrued liabilities consisted of the following:
 
July 31, 2020
 
January 31, 2020
Accrued salaries, vacation and related benefits
$
18.8

 
$
13.9

Accrued property taxes
4.5

 
2.3

Accrued incentive compensation
0.8

 
2.3

Other accrued liabilities
9.7

 
7.7

     Total accrued liabilities
$
33.8


$
26.2


NOTE 8 - Long-Term Debt

As of July 31, 2020, 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 the debt issuance costs for the Notes, total debt as of July 31, 2020 was $243.4.

As of July 31, 2020, 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 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 Services, LLC (“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 LIBOR plus the applicable margin (as defined in the ABL Facility). There were no outstanding amounts under the ABL Facility as of July 31, 2020.

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 the Company’s accounts receivable and inventory and contains customary conditions precedent to borrowing and affirmative and negative covenants, all of which were met as of July 31, 2020. Availability under the ABL Facility was $14.9 and $60.0 as of July 31, 2020 and January 31, 2020, respectively. The decrease in availability during the during the six months ended July 31, 2020 is primarily related to lower levels of activity and correspondingly lower levels of accounts receivable at July 31, 2020.

Letters of credit outstanding under the ABL Facility equaled an aggregate of $6.3 at July 31, 2020.

14


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 July 31, 2020. 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 $125.0 and $202.5 as of July 31, 2020 and January 31, 2020, respectively.

During the six months ended July 31, 2020, goodwill and long-lived assets, including certain property and equipment and purchased intangibles subject to amortization, were impaired as a result of a first quarter 2020 interim goodwill and long-lived asset impairment tests. The goodwill Level 3 fair value was determined using the average of the guideline public company analysis and the discounted cash flow analysis, both of which were unobservable. The long-lived asset Level 3 fair value was determined using the discounted cash flow analysis using the market and income approaches, both of which were unobservable.

Fair value is measured as of the impairment date. The following table summarizes the related post-impairment fair values of the corresponding assets.
 
July 31, 2020
 
January 31, 2020
 
Fair Value (1)

 
Carrying Value

Property and equipment, net
$
52.8

 
$
194.0

Goodwill

 
28.3

Intangible assets

 
39.2

 
$
52.8


$
261.5



(1) See Note 6 for a discussion of the changes in goodwill and long-lived asset values due to impairment charges recorded during the six months ended July 31, 2020.
NOTE 10 - Commitments, Contingencies and Off-Balance-Sheet Arrangements

Environmental Regulations & Liabilities

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 which may be required,

15


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

During the year ended January 31, 2020, the Company discovered a credit card theft of approximately $2.6 (which is included in cost of sales for the year ended January 31, 2020) and promptly reported the theft to its insurers and law enforcement. The Company has also filed suit against several third parties to recover damages related to the theft. While the Company cannot reasonably determine the outcome of this litigation at this time, it believes its insurance coverage will be available to recover some or all of this loss after the appropriate legal proceedings have concluded. The Company implemented additional expenditure controls to reduce the likelihood of similar thefts in the future, such as daily limits on all fuel cards and additional credit card activity reviews by management.

On June 9, 2020, a putative class action was filed by a purported KLXE stockholder in the United States District Court for the District of Delaware, captioned Eric Sabatini v. KLX Energy Services Holdings, Inc., et. al. (the “Sabatini Complaint”). On June 18, 2020, an individual action was filed by a purported KLXE stockholder in the United States District Court for the Southern District of New York, captioned Joey Zurchin v. KLX Energy Services Holdings, Inc., et. al. (the “Zurchin Complaint”). On June 24, 2020 an individual action was filed by a purported KLXE stockholder in the United States District Court for the District of Colorado, captioned David Cajiuat v. KLX Energy Services Holdings, Inc., et. al. (the “Cajiuat Complaint” and, together with the Sabatini Complaint and the Zurchin Complaint, the “KLXE Complaints”). The plaintiff in the Sabatini Complaint purported to bring the litigation as a securities class action on behalf of the public stockholders of KLXE. The Sabatini Complaint named as defendants KLXE, the KLXE Board, certain of KLXE’s subsidiaries and QES; the Zurchin complaint named as defendants KLXE and the KLXE Board; and the Cajiuat complaint named as defendants KLXE and the KLXE Board. The KLXE Complaints alleged violations of Section 14(a) of the Exchange Act, and Rule 14a-9 promulgated thereunder, as well as, in the case of the individual defendants, QES and KLXE’s subsidiaries named as defendants, the control person provisions of the Exchange Act. The Zurchin Complaint also alleged, in the case of the individual defendants, breach of the duty of candor/disclosure under state law. The KLXE Complaints alleged that the Company's registration statement on Form S-4, originally filed on June 2, 2020 (the "Registration Statement"), omitted material information with respect to the Merger, which rendered the Registration Statement false and misleading. In particular, the KLXE Complaints alleged, among other things, that the Registration Statement omitted details with respect to information regarding KLXE’s and QES’s financial projections, the analyses performed by Goldman Sachs Group Inc. ("Goldman Sachs"), in the case of the Sabatini Complaint, any prior work performed by Goldman Sachs for QES and, in the case of the Cajiuat Complaint, the sales process leading up to the Merger. The KLXE Complaints sought to enjoin the defendants from proceeding with the Merger, awards of the plaintiffs’ costs of the action, including attorneys’ and experts’ fees, and such other and further relief as the court may have deemed just and proper. In addition, each of the Sabatini Complaint and the Cajiuat Complaint sought rescission of the Merger or rescissory damages if the Merger was consummated and a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and the Sabatini Complaint sought an order directing the defendants to disseminate a registration statement that is free from material misstatement and omissions. The KLXE Complaints were subsequently voluntarily dismissed by the claimants.

On June 12, 2020, an action was filed by a purported QES stockholder in the United States District Court for the Southern District of New York, captioned Charles Matey v. Quintana Energy Services Inc., et. al. (the “Matey Complaint”). On June 19, 2020 an action was filed by a purported QES stockholder in the United States District Court for the Southern District of New York captioned Matthew Wilking v. Quintana Energy Services Inc., et. al. (the “Wilking Complaint” and, together with the Matey Complaint, the “QES Complaints”).The QES Complaints named as defendants QES and the QES Board. The QES Complaints alleged violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, as well as, in the case of the individual defendants, the control person provisions of the Exchange Act. The QES Complaints alleged that the Registration Statement misrepresented or omitted material information with respect to the Merger, which rendered the Registration Statement false and misleading. In particular, the QES Complaints alleged, among other things, that the Registration Statement: (a) contained material misrepresentations and omissions regarding QES’s financial

16


projections, Tudor, Pickering, Holt & Co.’s opinion, and, in the case of the Matey Complaint, Goldman Sachs’ opinion; and (b) failed to disclose, in the case of the Matey Complaint, the consideration that QES provided to Company A for entering into the exclusivity agreement executed on or about March 3, 2020 and, in the case of the Wilking Complaint, whether QES entered into a confidentiality agreement with Company A, and whether any such confidentiality agreement included a standstill provision. The QES Complaints sought to enjoin the defendants from proceeding with the Merger, an order directing the defendants to disseminate an amendment to the Registration Statement that is free from material misstatement and omissions, in the case of the Matey Complaint, unspecified damages, an award of the plaintiff’s costs of the action, including attorneys’ and experts’ fees, and such other and further relief as the court may deem just and proper. The QES Complaints were subsequently voluntarily dismissed by claimants.

On September 4, 2020, KLXE and QES signed a memorandum of understanding with all plaintiffs and agreed on the settlement of the KLXE Complaints and QES Complaints as relates to the respective mootness fee claims for an immaterial amount.

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 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 11 - Accounting for Stock-Based Compensation

The Company has a Long-Term Incentive Plan (“LTIP”) under which the compensation committee of the Board (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.

Compensation cost recognized during the three and six months ended July 31, 2020 and 2019 related to grants of restricted stock granted or approved by the Company’s Compensation Committee. Certain grants of restricted stock to directors and management accelerated in connection with the Merger on July 28, 2020, resulting in approximately $15.1 of stock-based compensation expense during the three months ended July 31, 2020. As a result, stock-based compensation was $17.4 and $4.6 for the three months ended July 31, 2020 and 2019, respectively and $16.7, and $9.0 for the six months ended July 31, 2020 and 2019, respectively. Unrecognized compensation cost related to restricted stock awards made by the Company was $6.0 at July 31, 2020.

As of the date of the QES acquisition, all unvested QES restricted stock unit awards were converted into replacement KLXE restricted stock unit awards. Approximately 2.0 shares of QES common stock subject to awards outstanding was converted to 0.2 shares of common stock assumed by KLXE.


17


The Company also has a qualified Employee Stock Purchase Plan (the “ESPP”), the terms of which allow for qualified employees (as defined in the ESPP) 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. Because the ESPP did not have enough shares reserved to satisfy outstanding options to purchase during the offering period ending June 30, 2020, the Company refunded participants’ contributions. In addition, the Company agreed with QES to suspend the ESPP for the Merger. As a result, compensation cost was $0.0 and immaterial for the three months ended July 31, 2020 and 2019, respectively, and $0.0 and $0.1 for the six months ended July 31, 2020 and 2019, respectively. The Company's shareholders approved an amendment to the ESPP at the Company's annual meeting on July 24, 2020, for an increase of 300,000 shares to the ESPP's share reserve.
NOTE 12 - Income Taxes

Income tax expense was $0.0 and $0.1 for the three and six months ended July 31, 2020, respectively, and was comprised primarily of state and local taxes, compared to $0.1 and $0.4 for the three and six months ended July 31, 2019, respectively. Because the Company has a 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.

In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may 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 $1.3 as of July 31, 2020. This deferral is included in other non-current liabilities on the condensed consolidated balance sheet. These payments are due in two installments: half on December 31, 2021 and half on December 31, 2022. The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.
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 Region (the Permian Basin and the Eagle Ford Shale), the Rocky Mountains Region (the Bakken, Williston, DJ, Uinta, Powder River, Piceance and Niobrara basins) 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”), the President and Chief Executive Officer, and the Chief Financial Officer. As a result, the CODM has determined the Company has three reportable segments.


18


The following table presents revenues and operating (losses) earnings by reportable segment:
 
Three Months Ended
 
Six Months Ended
 
July 31, 2020
 
July 31, 2019
 
July 31, 2020
 
July 31, 2019
Revenues
 
 
 
 
 
 
 
Southwest
$
4.2

 
$
53.3

 
$
28.6

 
$
111.3

Rocky Mountains
18.0

 
63.5

 
51.8

 
112.1

Northeast/Mid-Con
14.0

 
48.1

 
38.8

 
87.3

Total revenues
36.2

 
164.9

 
119.2

 
310.7

Operating (loss) earnings(1)(2)
 
 
 
 
 
 
 
Southwest
(11.1
)
 
(1.6
)
 
(111.5
)
 
(5.6
)
Rocky Mountains
(25.6
)
 
8.7

 
(63.4
)
 
11.6

Northeast/Mid-Con
(17.2
)
 
3.9

 
(114.6
)
 
7.4

Bargain purchase gain
41.1

 

 
41.1

 

Total operating (loss) earnings
(12.8
)
 
11.0

 
(248.4
)
 
13.4

Interest expense, net
7.6

 
7.4

 
15.0

 
14.5

(Loss) earnings before income taxes
$
(20.4
)
 
$
3.6

 
$
(263.4
)

$
(1.1
)
(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 and six months ended July 31, 2020 and 2019.
(2) Operating loss for the six month period ended July 31, 2020 includes a goodwill and long-lived asset impairment charge of $208.7, of which $91.3 was attributable to the Southwest segment, $28.3 was attributable to the Rocky Mountains segment and $89.1 was attributable to the Northeast/Mid-Con segment.

The following table presents revenues by service offering by reportable segment:
 
Three Months Ended
 
July 31, 2020
 
July 31, 2019
 
Southwest
 
Rocky
Mountains
 
Northeast
/Mid-Con
 
Total
 
Southwest
 
Rocky
Mountains
 
Northeast
/Mid-Con
 
Total
Completion revenues
$
1.6

 
$
11.5

 
$
8.8

 
$
21.9

 
$
38.0

 
$
37.5

 
$
20.0

 
$
95.5

Production revenues
1.2

 
3.1

 
2.5

 
6.8

 
5.5

 
13.0

 
10.1

 
28.6

Intervention revenues
1.4

 
3.4

 
2.7

 
7.5

 
9.8

 
13.0

 
18.0

 
40.8

Total revenues
$
4.2

 
$
18.0

 
$
14.0

 
$
36.2

 
$
53.3

 
$
63.5

 
$
48.1

 
$
164.9

 
Six Months Ended
 
July 31, 2020
 
July 31, 2019
 
Southwest
 
Rocky
Mountains
 
Northeast
/Mid-Con
 
Total
 
Southwest
 
Rocky
Mountains
 
Northeast
/Mid-Con
 
Total
Completion revenues
$
17.6

 
$
31.3

 
$
22.9

 
$
71.8

 
$
78.6

 
$
65.0

 
$
38.3

 
$
181.9

Production revenues
4.1

 
10.6

 
6.2

 
20.9

 
12.7

 
23.5

 
22.4

 
58.6

Intervention revenues
6.9

 
9.9

 
9.7

 
26.5

 
20.0

 
23.6

 
26.6

 
70.2

Total revenues
$
28.6


$
51.8


$
38.8


$
119.2


$
111.3


$
112.1


$
87.3


$
310.7



The following table presents capital expenditures by reportable segment:
 
Three Months Ended
 
Six Months Ended
 
July 31, 2020
 
July 31, 2019
 
July 31, 2020
 
July 31, 2019
Southwest
$
1.1

 
$
9.6

 
$
2.6

 
$
15.0

Rocky Mountains
1.9
 
11.2
 
4.1
 
22.7
Northeast/Mid-Con
0.7
 
6.4
 
1.8
 
19.1
   Total capital expenditures
$
3.7

 
$
27.2

 
$
8.5

 
$
56.8



19



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:
 
July 31, 2020 (1)
 
January 31, 2020
Southwest
$
96.6

 
$
203.6

Rocky Mountains
266.6

 
233.5

Northeast/Mid-Con
61.9

 
186.3

   Total assets
$
425.1


$
623.4

(1) See Note 6 for a discussion of the goodwill and long-lived asset impairment charge recorded during the six months ended July 31, 2020.

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

The following table presents total goodwill by reportable segment:
 
July 31, 2020
 
January 31, 2020
Southwest
$

 
$

Rocky Mountains(1)

 
28.3

Northeast/Mid-Con

 

   Total goodwill
$


$
28.3

(1) See Note 6 for a discussion of the goodwill impairment charge recorded during the six months ended July 31, 2020.
NOTE 14 - Net (Loss) Earnings Per Common Share

On July 28, 2020, immediately prior to consummation of the Merger, the Reverse Stock Split Amendment became effective and thereby effectuated the 1-for-5 Reverse Stock Split of the Company's issued and outstanding common stock.

Basic net loss per common share is computed using the weighted average common shares outstanding during the period and includes 83,333 shares of KLXE common stock to effect the Red Bone acquisition, which will be issued in September 2020. Such shares are included in the computation of basic weighted average common shares from the date of the acquisition. Diluted net 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 July 31, 2020 and 2019, 0.7 and 0.4 shares of the Company’s common stock, respectively, and for the six months ended July 31, 2020 and 2019, 0.7 and 0.5 shares, respectively, were excluded from the determination of diluted net loss per common share because their effect would have been anti-dilutive. The computations of basic and diluted net loss per share for the three and six months ended July 31, 2020 and 2019 are as follows:

20


 
Three Months Ended
 
Six Months Ended
 
July 31, 2020
 
July 31, 2019
 
July 31, 2020
 
July 31, 2019
Net (loss) earnings
$
(20.4
)
 
$
3.5

 
$
(263.5
)
 
$
(1.5
)
(Shares in millions) (2)
 
 
 
 
 
 
 
Basic weighted average common shares
5.0

 
4.5

 
4.8

 
4.4

Effect of dilutive securities - dilutive securities

 

 

 

Diluted weighted average common shares
5.0

 
4.5

 
4.8

 
4.4

 
 
 
 
 
 
 
 
Basic net (loss) earnings per common share (1) (2)
$
(4.12
)
 
$
0.78

 
$
(55.00
)
 
$
(0.34
)
Diluted net (loss) earnings per common share (1) (2)
$
(4.12
)
 
$
0.78

 
$
(55.00
)
 
$
(0.34
)
(1) On July 28, 2020, each issued and outstanding share of QES common stock was automatically converted into the right
to receive 0.0969 shares of KLXE common stock, which reflects adjustment for the 1-for-5 Reverse Stock Split of the KLXE common stock effected immediately prior to the consummation of the Merger.

(2) Shares and per share data have been retroactively adjusted to reflect the Company's 1-for-5 Reverse Stock Split effective
July 28, 2020.
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 include those discussed in our filings with the U.S. Securities and Exchange Commission (the "SEC"), in particular those discussed under the headings “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2020 and in this Quarterly Report, including the following factors:

the extraordinary market environment and impacts resulting from the COVID-19 pandemic and related swift and material decline in global crude oil demand and crude oil prices;
uncertainty regarding our future operating results;
our ability to successfully integrate the assets and operations that we acquired in connection with our acquisition of Quintana Energy Services Inc. and its affiliates (“QES”) and to realize anticipated revenues, cost savings or other anticipated benefits of such acquisition;
regulation of and dependence upon the energy industry;
the cyclical nature of the energy industry;
market prices for fuel, oil and natural gas;
our ability to maintain acceptable pricing for our services;
competitive conditions;
legislative or regulatory changes and potential liability under federal and state laws and regulations;
decreases in the rate at which oil or natural gas reserves are discovered or developed;
the impact of technological advances on the demand for our products and services;
delays of customers obtaining permits for their operations;
hazards and operational risks that may not be fully covered by insurance;
the write-off of a significant portion of intangible assets;

21


the need to obtain additional capital or financing, and the availability and/or cost of obtaining such capital or financing;
limitations that our organizational documents, debt instruments and U.S. federal income tax
requirements may have on our financial flexibility, our ability to engage in strategic transactions or our ability to declare and pay cash dividends on our common stock;
general economic conditions;
our credit profile;
changes in supply, demand and costs of equipment;
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;
loss or corruption of our information in a cyberattack on our computer systems;
increased labor costs or our ability to employ, or maintain the employment of, a sufficient number of key employees, technical personnel, and other skilled workers and qualified workers; and
the inability to successfully consummate acquisitions or inability to manage potential growth.

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 statements that we or persons acting on our behalf may issue.


22


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In millions of U.S. dollars and shares)

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 on Form 10-Q (“Quarterly Report”). 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 Note Regarding Forward-Looking Statements” appearing elsewhere in this Quarterly Report.

The following discussion and analysis address the results of our operations for the three and six months ended July 31, 2020, as compared to our results of operations for the three and six months ended July 31, 2019. On July 28, 2020, KLX Energy Services, Krypton Intermediate, LLC, an indirect wholly owned subsidiary of KLXE, Krypton Merger Sub, Inc., an indirect wholly owned subsidiary of KLXE ("Merger Sub"), and Quintana Energy Services Inc. ("QES"), completed the previously announced acquisition of QES, by means of a merger of Merger Sub with and into QES, with QES surviving the merger as a subsidiary of KLXE (the "Merger"). In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods. Unless otherwise noted or the context requires otherwise, references herein to KLXE Energy Services Holdings, Inc. (the "Company", "KLXE" or "KLX Energy Services") with respect to time periods prior to July 28, 2020 include KLXE and its consolidated subsidiaries and do not include QES and its consolidated subsidiaries, while references herein to KLXE with respect to time periods from and after July 28, 2020 include QES and its consolidated subsidiaries.

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, our people and our assets across all the geographic regions where we maintain a presence. In 2018, we acquired Motley Services, LLC ("Motley") and, during 2019, we acquired Tecton Energy Services ("Tecton") and Red Bone Energy Services LLC ("Red Bone"). We recently acquired QES during the second quarter of 2020 pursuant to the Merger, and by doing so helped establish KLXE as an industry leading provider of asset-light oilfield solutions across the full well lifecycle including drilling, completion, production and intervention services and products (our “product service lines” or “PSLs”) to the major onshore oil and gas producing regions of the United States.

On July 26, 2020, the Company’s board of directors (the "Board") approved a 1-for-5 reverse stock split to stockholders that became effective at 12:01 a.m. on July 28, 2020 (the "Reverse Stock Split"). On July 28, 2020, we successfully completed the all-stock Merger with QES. At the time of the closing, the holders of QES common stock received 0.0969 shares of KLXE common stock in exchange for each share of QES common stock held. KLXE and QES stockholders owned approximately 59% and 41%, respectively, of the equity of the combined company on a fully-diluted basis. As a result of the Merger, our Board is now comprised of nine directors, consisting of five directors designated by KLXE and four directors designated by QES. Additionally, Christopher J. Baker, the former President and Chief Executive Officer of QES, now serves as our President and Chief Executive Officer, and Keefer M. Lehner, the former Executive Vice President and Chief Financial Officer of QES, now serves as our Executive Vice President and Chief Financial Officer.

The combination of KLXE and QES provides increased scale to serve a blue-chip customer base across the onshore oil and gas basins in the United States. The Merger combines two strong company cultures comprised of highly talented teams with shared commitments to safety, performance, customer service and profitability. The combination leverages two of the largest fleets of coiled tubing and wireline assets, with KLXE becoming a

23


leading provider of large diameter coil tubing and wireline services and one of the largest independent providers of directional drilling to the U.S. market. The Company expects to generate at least $40.0 in annualized cost savings from the combination, and as of July 31, 2020, expects these cost synergies to be fully implemented as of the end of the first quarter of fiscal 2021 on a run rate basis, several months ahead of the timing at the announcement of the Merger. Synergies will be realized as management aligns common roles, processes and systems throughout each function and region. The Merger also enhances the Company's ability to effect industry consolidation. Looking ahead, the Company expects to pursue strategic, accretive consolidation opportunities that further strengthen the Company’s competitive positioning and capital structure, and drive efficiencies, accelerate growth and create longterm 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 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 Southwest Region (the Permian Basin and the Eagle Ford Shale), the Rocky Mountains Region (the Bakken, Williston, DJ, Uinta, Powder River, Piceance and Niobrara basins) 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 (losses) profits and identifiable assets are primarily attributable to these three reportable geographic segments. While we manage our business based upon these regional groupings, our assets and our technical personnel are deployed on a dynamic basis across all of our service facilities to optimize utilization and profitability.

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’ most challenging service needs, including their most 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 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 23 patents and 17 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, mission 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 older legacy wells.

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.


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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, exploration and production (“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 the most technically complex wells where the potential for increased operating leverage is high due to the large number of stages per well.

Recent Trends and Outlook

Demand for services in the oil and natural gas industry is cyclical and subject to sudden and significant volatility. For example, the oilfield service industry experienced an abrupt deterioration in demand during the second half of 2019, which has continued into 2020. During the first quarter of 2020, the novel coronavirus ("COVID-19") pandemic emerged and applied significant downward pressure on the global economy and oil demand and prices, leading North American operators to announce significant cuts to planned 2020 capital expenditures and causing continued acceleration of upstream oil and gas bankruptcies. The reduced activity levels have led to a plunging North America, onshore rig count, which fell by 68% for the first half of 2020. For the six months ended July 31, 2020, rig counts decreased by a total of 539 rigs from 790 rigs to 251 rigs. 

The extent and duration of the continued global impact of the COVID-19 pandemic is unknown. While economic activity has increased from the April 2020 lows, concerns about a COVID-19 resurgence have slowed the pace of a full return of social and commercial activity. The combination of the COVID-19 pandemic and supply concerns has driven a steep drop in oil prices, leading to decreases in demand for the Company's services. WTI decreased by approximately $18.00, or 31%, to $40.10 per barrel ("Bbl") as of July 31, 2020, compared to the closing price on July 31, 2019 of $58.53 per Bbl. Subsequent to July 31, 2020, prices have generally remained stable, but there is no certainty that they will not decline further or experience extreme volatility again.

Oil and natural gas prices are expected to continue to be volatile as a result of the near term production instability, the ongoing COVID-19 outbreaks and as changes in oil and natural gas inventories, industry demand and global and national economic performance are reported. Significant factors that are likely to affect commodity prices in current and future periods include, but are not limited to: the extent and duration of price reductions and production instability by the Organization of Petroleum Exporting Countries and all other oil producing nations (“OPEC+”) and other oil exporting nations; the effect of U.S. energy, monetary and trade policies on the economy and demand; U.S. and global economic conditions; U.S. and global political and economic developments, including the outcome of the U.S. presidential election and resulting energy and environmental policies; the impact of the ongoing COVID-19 outbreaks; and conditions in the U.S. oil and gas industry and the resulting demand and pricing for domestic land oilfield services.

If the current pricing environment for crude oil does not improve, our customers are expected to further reduce their capital expenditures, causing additional declines in the demand for, and prices of, our services, which would adversely affect our future results of operations, cash flows and financial position. Additionally, the decrease in oil and natural gas prices has adversely affected our customers and resulted in a decrease in the creditworthiness of some E&P operators. We carefully select our customers and believe we have a high quality customer base. However, if current conditions persist, there is no assurance that we will not experience losses in the future or delays in collecting our receivables.

The reduction in oil prices to current levels and the ongoing effects of the global COVID-19 outbreaks resulted in significant market instability. The potential for a reemergence of or spike in COVID-19 outbreaks may result in a global recession, with the possibility of further bankruptcies of E&P companies and a significant decline in demand and prices for oilfield services during 2020. We have taken, and are continuing to take, steps to reduce

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costs, including reductions in capital expenditures, as well as other workforce rightsizing and ongoing cost initiatives.

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 flow to select targeted opportunities, with the potential to deliver high returns that we believe offer superior margins over the long-term and short payback periods. 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 p