10-Q 1 klx-20150430x10q.htm 10-Q klx_Current folio_10Q

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, 2015

 

 

Commission File No. 0-18348

 

 

KLX INC.

 

(Exact name of registrant as specified in its charter)

 

 

 

 

 

DELAWARE

47-1639172

(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)

 

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES [X] NO [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer (do not check if a smaller reporting company) [X] Smaller reporting company [  ]

 

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 52,747,915 shares were outstanding as of May 25, 2015.

 

 


 

KLX INC.

 

Form 10-Q for the Quarter Ended April 30, 2015

 

Table of Contents

 

 

 

 

 

 

 

 

 

Page

Part I 

Financial Information

 

 

 

 

Item 1. 

Condensed Consolidated and Combined Financial Statements (Unaudited)

 

 

 

 

Condensed Consolidated Balance Sheets as of April 30, 2015, January 31, 2015 and December 31, 2014

 

 

 

 

Condensed Consolidated and Combined Statements of Earnings and Comprehensive Income for the Three Months Ended April 30, 2015 and March 31, 2014 and the One Month Ended January 31, 2015

 

 

 

 

Condensed Consolidated and Combined Statements of Cash Flows for the Three Months Ended April 30, 2015 and March 31, 2014 and the One Month Ended January 31, 2015

 

 

 

 

Notes to Condensed Consolidated and Combined Financial Statements

 

 

 

Item 2. 

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

15 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

25 

 

 

 

Item 4. 

Controls and Procedures

25 

 

 

 

Part II 

Other Information

 

 

 

 

Item 6. 

Exhibits

26 

 

 

 

Signatures 

27 

 

 

 

2


 

PART I - FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

KLX INC.

CONDENSED CONSOLIDATED BALANCE SHEETS  (UNAUDITED)

(In  Millions, Except  Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30, 

 

January 31, 

 

December 31,

 

 

    

2015

    

2015

  

2014

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

429.1 

 

$

447.2 

 

$

470.8 

 

Accounts receivable – trade, less allowance for doubtful accounts ($8.9 at April 30, 2015, $8.0 at January 31, 2015, $8.1 at December 31, 2014)

 

 

305.7 

 

 

304.2 

 

 

308.0 

 

Inventories, net

 

 

1,314.1 

 

 

1,322.1 

 

 

1,289.2 

 

Deferred income taxes

 

 

39.1 

 

 

37.2 

 

 

37.5 

 

Other current assets

 

 

53.2 

 

 

51.3 

 

 

50.6 

 

Total current assets

 

 

2,141.2 

 

 

2,162.0 

 

 

2,156.1 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation ($80.5 at April 30, 2015, $67.1 at January 31, 2015, $63.1 at December 31, 2014)

 

 

354.3 

 

 

333.3 

 

 

332.2 

 

Goodwill

 

 

1,284.8 

 

 

1,286.5 

 

 

1,328.7 

 

Identifiable intangible assets, net

 

 

450.5 

 

 

457.3 

 

 

442.3 

 

Other assets

 

 

45.1 

 

 

45.4 

 

 

44.3 

 

 

 

$

4,275.9 

 

$

4,284.5 

 

$

4,303.6 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

161.3 

 

$

142.5 

 

$

149.9 

 

Deferred acquisition payments

 

 

 -

 

 

92.2 

 

 

92.2 

 

Accrued liabilities

 

 

127.5 

 

 

98.1 

 

 

88.1 

 

Total current liabilities

 

 

288.8 

 

 

332.8 

 

 

330.2 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

1,200.0 

 

 

1,200.0 

 

 

1,200.0 

 

Deferred income taxes

 

 

133.5 

 

 

121.9 

 

 

123.5 

 

Other non-current liabilities

 

 

30.3 

 

 

28.7 

 

 

29.6 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 1.0 million shares authorized; no shares outstanding

 

 

--

 

 

--

 

 

--

 

Common stock, $0.01 par value; 250.0 million shares authorized; 52.7 million shares issued as of April 30, 2015, 52.8 million shares issued as of January 31, 2015 and 52.5 million shares issued as of December 31, 2014

 

 

0.5 

 

 

0.5 

 

 

0.5 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

2,649.6 

 

 

2,644.8 

 

 

2,644.1 

 

Treasury stock: 1,467 shares at April 30, 2015 and 0 shares at January 31, 2015 and December 31, 2014

 

 

(0.1)

 

 

 -

 

 

 -

 

Retained earnings

 

 

29.2 

 

 

11.3 

 

 

4.2 

 

Accumulated other comprehensive loss

 

 

(55.9)

 

 

(55.5)

 

 

(28.5)

 

Total stockholders’ equity

 

 

2,623.3 

 

 

2,601.1 

 

 

2,620.3 

 

 

 

$

4,275.9 

 

$

4,284.5 

 

$

4,303.6 

 

 

See accompanying notes to condensed consolidated and combined financial statements.

3


 

 

KLX INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF EARNINGS  

AND COMPREHENSIVE INCOME (UNAUDITED)

(In  Millions, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

MONTH ENDED

 

 

 

APRIL 30, 

 

MARCH 31,

 

JANUARY 31, 

 

 

 

2015

 

2014

 

2015

 

Product revenues

 

$

348.0 

 

$

326.4 

    

$

93.1 

 

Service revenues

 

 

83.5 

 

 

44.5 

 

 

39.9 

 

Total revenues

 

 

431.5 

 

 

370.9 

 

 

133.0 

 

Cost of sales - products

 

 

243.7 

 

 

224.7 

 

 

67.1 

 

Cost of sales - services

 

 

80.2 

 

 

31.1 

 

 

28.5 

 

Total cost of sales

 

 

323.9 

 

 

255.8 

 

 

95.6 

 

Selling, general and administrative

 

 

60.1 

 

 

46.2 

 

 

19.7 

 

Operating earnings

 

 

47.5 

 

 

68.9 

 

 

17.7 

 

Interest expense (income)

 

 

18.6 

 

 

(0.1)

 

 

6.3 

 

Earnings before income taxes

 

 

28.9 

 

 

69.0 

 

 

11.4 

 

Income taxes

 

 

11.0 

 

 

25.0 

 

 

4.3 

 

Net earnings

 

$

17.9 

 

$

44.0 

 

$

7.1 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(0.4)

 

 

1.0 

 

 

(27.0)

 

Comprehensive income

 

$

17.5 

 

$

45.0 

 

$

(19.9)

 

Net earnings per share - basic

 

$

0.34 

 

$

0.84 

 

$

0.14 

 

Net earnings per share - diluted

 

$

0.34 

 

$

0.84 

 

$

0.14 

 

Weighted average common shares - basic

 

 

52.2 

 

 

52.2 

 

 

52.2 

 

Weighted average common shares - diluted

 

 

52.3 

 

 

52.3 

 

 

52.3 

 

 

See accompanying notes to condensed consolidated and combined financial statements.

 

 

 

4


 

KLX INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In  Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

MONTH ENDED

 

 

 

APRIL 30, 

 

MARCH 31,

 

JANUARY 31, 

 

 

    

2015

    

2014

    

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

    

 

 

 

Net earnings

 

$

17.9 

 

$

44.0 

 

$

7.1 

 

Adjustments to reconcile net earnings to net cash flows provided by (used in) operating activities

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

20.9 

 

 

11.3 

 

 

7.3 

 

Deferred income taxes

 

 

9.8 

 

 

9.5 

 

 

(0.4)

 

Non-cash compensation

 

 

3.9 

 

 

1.0 

 

 

0.7 

 

Excess tax benefits

 

 

(0.9)

 

 

(0.2)

 

 

 -

 

Provision for doubtful accounts

 

 

0.9 

 

 

 -

 

 

(0.1)

 

Loss on disposal of property and equipment

 

 

0.5 

 

 

0.1 

 

 

 -

 

Changes in operating assets and liabilities, net of effects from acquisitions

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2.3)

 

 

(48.7)

 

 

1.9 

 

Inventories

 

 

7.9 

 

 

(46.9)

 

 

(34.6)

 

Other current and non-current assets

 

 

(1.6)

 

 

(9.8)

 

 

(2.6)

 

Accounts payable

 

 

18.4 

 

 

61.4 

 

 

(7.2)

 

Other current and non-current liabilities

 

 

31.2 

 

 

(20.6)

 

 

12.8 

 

Net cash flows provided by (used in) operating activities

 

 

106.6 

 

 

1.1 

 

 

(15.1)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(35.6)

 

 

(21.0)

 

 

(6.2)

 

Acquisitions, net of cash acquired

 

 

1.0 

 

 

(256.4)

 

 

 -

 

Net cash flows used in investing activities

 

 

(34.6)

 

 

(277.4)

 

 

(6.2)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(0.1)

 

 

 -

 

 

 -

 

Excess tax benefits

 

 

0.9 

 

 

0.2 

 

 

 -

 

Net transfers from B/E Aerospace

 

 

 -

 

 

234.3 

 

 

 -

 

Deferred acquisition payments

 

 

(91.0)

 

 

 -

 

 

 -

 

Net cash flows (used in) provided by financing activities

 

 

(90.2)

 

 

234.5 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

0.1 

 

 

0.4 

 

 

(2.3)

 

 

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(18.1)

 

 

(41.4)

 

 

(23.6)

 

Cash and cash equivalents, beginning of period

 

 

447.2 

 

 

78.6 

 

 

470.8 

 

Cash and cash equivalents, end of period

 

$

429.1 

 

$

37.2 

 

$

447.2 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

 

 

 

 

Income taxes

 

$

3.6 

 

$

16.9 

 

$

0.6 

 

Interest

 

 

0.4 

 

 

 -

 

 

 -

 

 

See accompanying notes to condensed consolidated and combined financial statements.

 

 

5


 

KLX INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Unaudited - In Millions, Except Per Share Data)

 

Note 1.Description of Business and Basis of Presentation

 

On December 17, 2014, B/E Aerospace, Inc. (“Former Parent” or “B/E Aerospace”) created an independent public company through a spin-off of its Aerospace Solutions Group (“ASG) and Energy Services Group (“ESG”) businesses to Former Parent’s stockholders (“Spin-Off”). As a result of the Spin-Off, KLX Inc. (the “Company” or “KLX”) now operates as an independent, publicly traded company. Basic and diluted earnings per common share and the average number of common shares outstanding were retrospectively restated for the three months ended March 31, 2014 for the number of the Company’s shares outstanding immediately following the transaction.

 

On February 24, 2015, the Board of Directors approved a change in the Company's fiscal year end from December 31 to January 31. This change to the new reporting cycle began February 1, 2015. As a result of the change, the Company is reporting a January 2015 fiscal month transition period, which is reported in this Quarterly Report on Form 10-Q for the quarter ended April 30, 2015 and will be in the Company's Annual Report on Form 10-K for the calendar year ending January 31, 2016.

 

Financial information for the three months ended April 30, 2014 has not been included in this Form 10-Q for the following reasons: (i) the three month period ended March 31, 2014 provides a meaningful comparison for the three months ended April 30, 2015; (ii) there are no significant factors, seasonal or otherwise, that would impact the comparability of information if the results for the three months ended April 30, 2014 were presented in lieu of results for the three-month period ended March 31, 2014; and (iii) it was not practicable or cost justified to prepare this information.

 

The accompanying unaudited condensed consolidated and combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (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 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 and combined 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. The information included in these condensed consolidated and combined financial statements should be read in conjunction with the consolidated and combined financial statements and accompanying notes included in the KLX Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

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. 

 

The Company’s unaudited condensed consolidated and combined financial statements include KLX and its wholly owned subsidiaries. Prior to the Spin-Off on December 17, 2014, KLX’s financial statements were derived from B/E Aerospace’s consolidated and combined financial statements and accounting records as if it was operated on a stand-alone basis and were prepared in accordance with GAAP. All intercompany transactions and account balances within the Company have been eliminated.

 

Note 2.Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which updated the

6


 

guidance in ASC Topic 835, Interest. The updated guidance is effective retrospectively for annual periods and interim periods within the annual periods beginning after December 15, 2015. Early adoption is permitted, including early adoption in an interim period. The amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The Company will adopt ASU 2015-03 in the fiscal year beginning February 1, 2016 and currently has debt issuance costs of $27.4, $28.2 and $28.5 as of April 30, 2015, January 31, 2015 and December 31, 2014 respectively, included in other assets.

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, which updated the guidance in ASC Topic 606, Revenue Recognition. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016. Early application is not permitted. 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. The Company is currently evaluating the impact this guidance will have on its consolidated financial condition, results of operations, cash flows and disclosures and is currently unable to estimate the impact of adopting this guidance.

 

Note 3.Business Combinations

 

During 2013, the Company acquired the assets of Blue Dot Energy Services, LLC (“Blue Dot”) and Bulldog Frac Rentals, LLC (“Bulldog”) (the “2013 Acquisitions”), providers of parts distribution, rental equipment and on-site services to the oil and gas industry, for a net purchase price of $114.0. The excess of the purchase price over the fair value of the identifiable assets acquired approximated $70.6, of which $33.2 was allocated to identified intangible assets, consisting of customer contracts and relationships and covenants not to compete, and $37.4 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 five years.

 

In January 2014, the Company acquired the assets of the LT Energy Services group of companies ("LT"), an Eagle Ford Shale provider of rental equipment, for a net purchase price of approximately $102.5. In February 2014, the Company acquired the assets of Wildcat Wireline LLC ("Wildcat"), a provider of wireline services primarily in the Eagle Ford Shale and also in the Marcellus/Utica Shales, for a net purchase price of approximately $153.4. In April 2014, the Company acquired the assets of the Vision Oil Tools, LLC group of companies ("Vision"), a provider of technical services and associated rental equipment to the energy sector. Vision established a new geographical base of operations for the Company in the North Dakota (Williston/Bakken) and Rocky Mountain regions. The total purchase price was $175.7,  which included a deferred payment of $35.0,  which was paid during the first quarter of fiscal year 2015 based on the achievement of 2014 financial results. In April 2014, the Company acquired the assets of the Marcellus Gasfield Services group of companies ("MGS") engaged in manufacturing and rental of equipment in the Marcellus/Utica Shales for approximately $44.0. During June 2014, the Company also acquired the assets of the Cornell Solutions group of companies ("Cornell"), which provides technical services and rental equipment to the energy sector in the Eagle Ford Shale and Permian Basin. The total purchase price was $128.2,  which included a deferred payment of $56.0,  which was paid during the first quarter of fiscal year 2015 based on the achievement of 2014 financial results. These acquisitions are referred to collectively as the "2014 Acquisitions."

 

For the 2014 Acquisitions, based on our preliminary purchase price allocation, the excess of the purchase price over the fair value of the identifiable assets acquired approximated $431.3, of which $152.9 was allocated to identified intangible assets, consisting of customer contracts and relationships and covenants not to compete, and $278.4 is included in goodwill. The useful life assigned to the customer

7


 

contracts and relationships is between 11-20 years, and the covenants not to compete are being amortized over their contractual periods of five years.

 

The 2014 and 2013 Acquisitions were accounted for as purchases under FASB ASC 805, Business Combinations (“ASC 805”). The assets purchased and liabilities assumed for the 2014 and 2013 Acquisitions have been reflected in the accompanying consolidated balance sheets as of April 30, 2015, January 31, 2015 and December 31, 2014 and the results of operations for the 2014 and 2013 Acquisitions are included in the accompanying consolidated and combined statements of earnings from the respective dates of acquisition.

 

The Company completed its evaluation and allocation of the purchase price for the MGS and Vision acquisitions during the first quarter of fiscal 2015. The Company has not yet finalized its allocation of the purchase price for the Cornell acquisition as the valuation of certain assets, principally intangible assets, is not yet complete.

 

The following table summarizes the current estimates of fair values of assets acquired and liabilities assumed in the 2014 and 2013 Acquisitions in accordance with ASC 805, which are currently recorded based on management’s estimates as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

    

Wildcat

    

Vision

    

Cornell

    

Acquisitions

    

2014

    

2013

 

Accounts receivable-trade

 

$

0.4 

 

$

10.8 

 

$

10.5 

 

$

15.1 

 

$

36.8 

 

$

14.8 

 

Inventories

 

 

1.3 

 

 

--

 

 

--

 

 

0.4 

 

 

1.7 

 

 

3.9 

 

Other current and non-current assets

 

 

--

 

 

2.4 

 

 

--

 

 

0.1 

 

 

2.5 

 

 

0.2 

 

Property and equipment

 

 

30.3 

 

 

44.1 

 

 

28.5 

 

 

40.5 

 

 

143.4 

 

 

35.5 

 

Goodwill

 

 

83.7 

 

 

69.8 

 

 

66.6 

 

 

58.3 

 

 

278.4 

 

 

37.4 

 

Identified intangibles

 

 

37.7 

 

 

50.1 

 

 

24.5 

 

 

40.6 

 

 

152.9 

 

 

33.2 

 

Accounts payable

 

 

--

 

 

(1.5)

 

 

(0.7)

 

 

(4.3)

 

 

(6.5)

 

 

(10.0)

 

Other current and non-current liabilities

 

 

--

 

 

(35.0)

 

 

(57.2)

 

 

(4.2)

 

 

(96.4)

 

 

(1.0)

 

Total consideration paid

 

$

153.4 

 

$

140.7 

 

$

72.2 

 

$

146.5 

 

$

512.8 

 

$

114.0 

 

 

The majority of the goodwill and other intangible assets related to the 2014 and 2013 Acquisitions is expected to be deductible for tax purposes.

 

Revenues and net earnings from the 2013 Acquisitions and 2014 Acquisitions, which are included in the Company’s results for the three months ended April 30, 2015 and March 31, 2014 and the one month ended January 31, 2015, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

MONTH ENDED

 

 

 

APRIL 30, 

 

MARCH 31,

 

JANUARY 31, 

 

 

    

2015

    

2014

    

2015

 

Revenues

 

$

83.5 

 

$

44.5 

 

$

39.9 

 

Net earnings (loss)

 

 

(8.2)

 

 

3.4 

 

 

3.0 

 

 

On a pro forma basis to give effect to the 2013 and 2014 Acquisitions as if they occurred on January 1, 2013, revenues and net earnings for the three months ended March 31, 2014 were as follows: 

 

 

 

 

 

 

 

 

MARCH 31,

 

 

2014

 

 

Pro forma

  

Revenues

423.0 

 

Net earnings

53.1 

 

Earnings per diluted share

1.02 

 

 

 

 

 

8


 

 

 

 

 

Note 4. Inventories

 

Inventories, made up of finished goods, primarily consist of aerospace fasteners and consumables. The Company values inventories at the lower of cost or market, using first‑in, first‑out or weighted average cost method. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical demand, estimated product demand to support contractual supply agreements with its customers and the age of the inventory, among other factors. Demand for the Company’s products can fluctuate from period to period depending on customer activity. Inventory reserves were approximately $35.2,  $33.5 and $33.0 as of April 30, 2015, January 31, 2015 and December 31, 2014,  respectively.

 

Substantially all of our inventory is comprised of aerospace grade fasteners, which support original equipment manufacturer (“OEM”)  production and the aftermarket over the life of the airframe. Inventory with a limited shelf life is continually monitored and reserved for in advance of expiration. The provision for inventory with limited shelf life is relatively insignificant and has not exceeded $0.5 during the past three years.

 

Note 5.Goodwill and Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30,  2015

 

 

 

Useful Life

 

Original

 

Accumulated

 

Net Book

 

 

    

(Years)

    

Cost

    

Amortization

    

Value

  

Customer contracts and relationships

 

8

-

30

 

$

530.9 

 

$

108.9 

 

$

422.0 

 

Covenants not to compete

 

4

-

5

 

 

17.2 

 

 

6.3 

 

 

10.9 

 

Trade names

 

Indefinite

 

 

17.6 

 

 

 -

 

 

17.6 

 

 

 

 

 

 

 

$

565.7 

 

$

115.2 

 

$

450.5 

 

 

Amortization expense associated with identifiable intangible assets was approximately $6.6, $6.3 and $2.8 for the three months ended April 30, 2015 and March 31, 2014 and the one month ended January 31, 2015, respectively. The Company currently expects to recognize amortization expense of approximately $27 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 such as changes in exchange rates for assets acquired outside the United States. The Company expenses costs to renew or extend the term of a recognized intangible asset. Goodwill decreased $1.7 as compared to January 31, 2015 as a result of purchase price allocation adjustments and foreign currency translations and decreased $43.9 as compared to December 31, 2014, as a result of purchase price allocation adjustments associated with the 2014 Acquisitions and foreign currency translations.

 

The fair value of the ESG reporting unit exceeded the carrying value by approximately 28% as of December 31, 2014, and approximately $319.5 of goodwill has been allocated to the ESG reporting unit as of April 30, 2015. The precipitous decline in oil and gas prices, which began in late 2014 and which has resulted in significant cut backs in capital expenditures by our oil and gas customers, continued into the first quarter of 2015. The approximately 50% year-over-year decline in onshore rig count has led to a reduction in our customers’ capital expenditures and has negatively impacted our business in the form of volume declines and pricing concessions across many of the service lines and geographies in which we operate. In response to these evolving industry conditions, our approach is to first ensure that we manage our ESG business prudently by closely monitoring costs while positioning our resources in those activities and regions, which we believe will maximize our revenue opportunities. Secondly, our strategy is to maintain sufficient liquidity to take advantage of opportunities that will present themselves. We will also

9


 

focus on operational excellence and continuous improvement initiatives. Finally, we will work hard to uncover high return acquisition opportunities over the next 18-24 months. However, there can be no assurance such measures will prevent our ESG business from suffering continued operating losses from reduction in the volume and/or pricing of its services. ESG's cash flow projections were a significant input into the December 31, 2014 fair value. If the ESG business continues to be unable to achieve projected results or long-term projections are adjusted downward, it could negatively impact future valuations of the ESG reporting unit and result in a material impairment charge.

 

Note 6. Related Party Transactions

 

The condensed combined statements of earnings and comprehensive income for the three months ended March 31, 2014 include an allocation of general corporate expenses from Former Parent.  These costs were allocated to the Company on a systematic and reasonable basis when identifiable, with the remainder allocated on the basis of costs incurred, headcount or other measures. 

 

Allocations for general corporate expenses, including management costs and corporate support services provided to the Company, totaled $6.4 for the three months ended March 31, 2014. These amounts include costs 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 Spin-Off, we have created in-house some of the functions that were previously provided to us through corporate allocations from Former Parent. In addition, we have entered into certain agreements with Former Parent relating to transition services and IT services for a transitional period of approximately 24 months following the Spin-Off. In addition, we entered into an employee matters agreement and a tax sharing and indemnification agreement with Former Parent in connection with the Spin-Off. This transitional support enables KLX to establish its stand-alone processes for various activities that were previously provided by Former Parent and does not constitute significant continuing support of KLX’s operations. The Company does not expect those agreements to have a material effect on our financial statements.  Costs incurred pursuant to these arrangements for the one and three month periods ended January 31, 2015 and April 30, 2015 were $0.8 and $2.4, respectively.

 

Sales and cost of sales to affiliates for the three months ended April 30, 2015 and March 31, 2014 and the one month ended January 31, 2015 were not significant.

 

Note 7.Accrued Liabilities

 

Accrued liabilities consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

April 30,  2015

    

January 31,  2015

    

December 31, 2014

 

Accrued salaries, vacation and related benefits

 

$

24.9 

 

$

14.9 

 

$

13.2 

 

Income tax payable

 

 

20.1 

 

 

23.3 

 

 

19.7 

 

Other taxes accrued

 

 

6.2 

 

 

6.7 

 

 

5.6 

 

Accrued interest

 

 

26.6 

 

 

9.0 

 

 

3.1 

 

Other accrued liabilities

 

 

49.7 

 

 

44.2 

 

 

46.5 

 

 

 

$

127.5 

 

$

98.1 

 

$

88.1 

 

 

Note 8.Long-Term Debt

 

As of April 30, 2015, long-term debt consisted of $1,200.0 aggregate principal amount of the Company’s 5.875% senior unsecured notes due 2022 (the “5.875% Notes”). As of April 30, 2015, the Company also had a $500.0 secured revolving credit facility pursuant to a credit agreement dated as of December 16, 2014 (the “Revolving Credit Facility”).

 

10


 

Borrowings under the Revolving Credit Facility bear interest at an annual rate equal to the London interbank offered rate (“LIBOR”) (as defined in the Revolving Credit Facility) plus the applicable margin (as defined)No amounts were outstanding under the Revolving Credit Facility as of April 30, 2015.  

 

On May 19, 2015, we amended the secured Revolving Credit Facility to a structure tied to a borrowing base formula, and in the process increased the size to $750.0 while reducing the interest rate margins applicable to any borrowings under the facility. As a result, the amended and restated line of credit has no maintenance financial covenants.  This amended and restated credit facility matures in May 2020.

 

Letters of credit outstanding under the Revolving Credit Facility aggregated $0.4 at each of April 30, 2015, January 31, 2015 and December 31, 2014.

 

 

Note 9.Fair Value Measurements

 

All short-term financial instruments are generally 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 (which the Company classifies as Level 1 assets), accounts receivable – trade and accounts payable represent their respective fair values due to their short- term nature. There was no debt outstanding under the Revolving Credit Facility as of April 30, 2015. The fair value of the Company’s senior notes, based on market prices for publicly-traded debt (which the Company classifies as Level 2 inputs), was $1,210.6, $1,182.0 and $1,206.0 as of April 30, 2015, January 31, 2015 and December 31, 2014 respectively.

 

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, 2015, future minimum lease payments under these arrangements approximated $99.9, the majority of which 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 combined 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

11


 

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 combined financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.

 

The Company has employment agreements with three year initial terms, which renew for one additional year on each anniversary date, with certain key members of management. The Company’s employment agreements generally provide for certain protections in the event of a change of control. These protections generally include the payment of severance and related benefits under certain circumstances in the event of a change of control.

 

Environmental Matters - In July 2014, one of the Company’s German businesses, Interturbine Aviation Logistics GmbH (ITL), which was acquired by B/E Aerospace Systems Holding GmbH (now known as KLX Aerospace Solutions DE Holding GmbH) in July 2012, was informed by German authorities that it had allegedly violated certain provisions of environmental and health and safety regulations related to the import and sale of certain chemical products for the period of 2009 through 2013. The Company is cooperating with German authorities and currently investigating the amounts of chemical products that were imported and sold allegedly in violation of the applicable laws. The ITL executive pre-acquisition continued to operate the business through July 2014, at which time he was removed. These violations could result in an administrative monetary penalty and a disgorgement of profits from the sale of products sold in violation of the applicable laws. While the Company is not currently able to determine the probability or estimable range of liability, if any, which it may ultimately be found to be responsible for that is not covered by any indemnity claims against the seller of ITL, it does not believe an adverse outcome would be material to the Company.

 

Note 11.Accounting for Stock-Based Compensation

 

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

 

The Company accounts for share-based compensation arrangements in accordance with the provisions of FASB ASC 718, Compensation—Stock Compensation (“ASC 718”), whereby share-based compensation cost is measured on the date of grant, based on the fair value of the award, and is recognized over the requisite service period.

 

Compensation cost recognized during the three months ended March 31, 2014 related to grants of restricted stock and restricted stock units granted or approved by our Former Parent. All unvested shares of restricted stock were converted into unvested shares of KLX on the distribution date at a ratio equal to 1.8139.  Compensation cost recognized during the three months ended April 30, 2015 and March 31, 2014 and the one month ended January 31, 2015 related to the unvested shares converted on the distribution date and new shares of KLX restricted stock and stock options granted in January 2015 was $3.8, $1.0 and $0.7, respectively. Unrecognized compensation expense related to these grants was $35.7 at April 30, 2015.

 

The Company has established a qualified Employee Stock Purchase Plan similar to the Former Parent’s plan (“KLX Plan”). The KLX Plan allows qualified employees (as defined in the plan) to participate in the purchase of designated shares of KLX’s common stock at a price equal to 85% of the closing price for each semi-annual stock purchase period. The fair value of employee purchase rights represents the difference between the closing price of KLX’s shares on the date of purchase and the purchase price of the shares. Compensation cost for this plan was not material to any of the periods presented.

 

12


 

Note 12.Segment Reporting

 

The Company is organized based on the products and services it offers. As a result of the ESG acquisitions, the Company determined that ESG met the requirements of a reportable segment operating in a single line of business. The Company’s ASG reportable segment, which is also its operating segment, is comprised of consumables management and is in a single line of business. The segment regularly reports its results of operations and makes 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, the President and Chief Operating Officer and the Vice President – Chief Financial Officer and Treasurer. As a result, the CODM has determined the Company has two reportable segments.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

MONTH ENDED

 

 

 

APRIL 30, 

 

MARCH 31,

 

JANUARY 31,

 

 

    

2015

    

2014

    

2015

 

Aerospace solutions group

 

$

348.0 

 

$

326.4 

 

$

93.1 

 

Energy services group

 

 

83.5 

 

 

44.5 

 

 

39.9 

 

Total revenues

 

 

431.5 

 

 

370.9 

 

 

133.0 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings (1)

 

 

 

 

 

 

 

 

 

 

Aerospace solutions group

 

 

60.8 

 

 

63.6 

 

 

12.9 

 

Energy services group

 

 

(13.3)

 

 

5.3 

 

 

4.8 

 

Total operating earnings

 

 

47.5 

 

 

68.9 

 

 

17.7 

 

Interest expense (income)

 

 

18.6 

 

 

(0.1)

 

 

6.3 

 

Earnings before income taxes

 

$

28.9 

 

$

69.0 

 

$

11.4 

 

 


(1)

Operating earnings include an allocation of employee benefits and general and administrative costs based on the proportion of each segment’s number of employees and sales, respectively.

 

The following table presents capital expenditures by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

MONTH ENDED

 

 

 

APRIL 30, 

 

MARCH 31,

 

JANUARY 31,

 

 

    

2015

    

2014

    

2015

 

Aerospace solutions group

 

$

5.4 

 

$

4.2 

 

$

1.7 

 

Energy services group

 

 

30.2 

 

 

16.8 

 

 

4.5 

 

 

 

$

35.6 

 

$

21.0 

 

$

6.2 

 

 

Corporate capital expenditures have been allocated to the above segments based on each segment’s percentage of total capital expenditures.

 

The following table presents goodwill by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30,

 

January 31,

 

December 31,

 

 

    

2015

    

2015

    

2014

 

Aerospace solutions group

 

$

965.3 

 

$

965.8 

 

$

986.3 

 

Energy services group

 

 

319.5 

 

 

320.7 

 

 

342.4 

 

 

 

$

1,284.8 

 

$

1,286.5 

 

$

1,328.7 

 

 

13


 

The following table presents total assets by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30,

 

January 31,

 

December 31,

 

    

2015

    

2015

  

2014

Aerospace solutions group

 

$

3,311.0 

 

$

3,298.5 

 

$

3,316.1 

Energy services group

 

 

964.9 

 

 

986.0 

 

 

987.5 

 

 

$

4,275.9 

 

$

4,284.5 

 

$

4,303.6 

 

Corporate assets (including cash and cash equivalents) of $488.7, $510.9 and $531.4 at April 30, 2015 January 31, 2015 and December 31, 2014, respectively, have been allocated to the above segments based on each segment’s percentage of total assets.

 

Note 13.Net Earnings Per Common Share

 

Basic net earnings per common share is computed using the weighted average common shares outstanding during the period. Diluted net earnings per common share is computed by using the weighted average common shares outstanding including the dilutive effect of stock options, shares issued under the KLX Plan and restricted shares based on an average share price during the period. For the three months ended  April 30, 2015 and March 31, 2014 and the one month ended January 31, 2015, approximately 1.0,  0.1 and 1.0 shares of the Company’s common stock, respectively, were excluded from the determination of diluted earnings per common share because their effect would have been anti-dilutive. The computations of basic and diluted earnings per share for the three months ended April 30, 2015 and March 31, 2014 and the one month ended January 31, 2015, respectively, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

MONTH ENDED

 

 

 

APRIL 30, 

 

MARCH 31,

 

JANUARY 31,

 

 

    

2015

    

2014

    

2015

 

Net earnings

    

$

17.9 

    

$

44.0 

    

$

7.1 

  

(shares in millions)

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

 

52.2 

 

 

52.2 

 

 

52.2 

 

Effect of dilutive securities - Dilutive securities

 

 

0.1 

 

 

0.1 

 

 

0.1 

 

Diluted weighted average common shares

 

 

52.3 

 

 

52.3 

 

 

52.3 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings per common share

 

$

0.34 

 

$

0.84 

 

$

0.14 

 

Diluted net earnings per common share

 

$

0.34 

 

$

0.84 

 

$

0.14 

 

 

Note 14.Accounting for Uncertainty in Income Taxes

 

In accordance with FASB ASC 740, Income Taxes (“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. As of April 30, 2015 and March 31, 2014 and the one month ended January 31, 2015, the Company had $9.3, $1.7 and $9.4, respectively, of net unrecognized tax benefits. This liability, if recognized, would affect the Company’s effective tax rate. The Company is currently open to audit by the tax authorities for the seven tax years ended December 31, 2014. There are currently no material income tax audits in progress.

 

The Company classifies interest and penalties related to income tax as income tax expense. The amount included in the Company’s liability for unrecognized tax benefits for interest and penalties was immaterial at April 30, 2015, March 31, 2014 and January 31, 2015. 

 

14


 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(In Millions, Except Per Share Data)

 

The following discussion and analysis addresses the results of our operations for the three months  ended April 30, 2015 as compared to our results of operations for the three months ended March 31,  2014. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods. We previously reported we expect to incur approximately $25 - $30 of one-time costs related to branding, new IT system alignments and other related start-up expenses. Additionally, we reported we expect our annual operating costs as a stand-alone public company will be approximately $25 higher than the expenses historically allocated to us from B/E Aerospace, Inc. (“Former Parent” or “B/E Aerospace”). 

 

We believe, based on our experience in the industry, that we are the world’s leading distributor and value‑added service provider of aerospace fasteners and consumables, and that we offer one of the broadest ranges of aerospace hardware and consumables and inventory management services worldwide. Through organic growth and a number of strategic acquisitions beginning in 2001, we believe we have become our industry’s leading provider of aerospace fasteners, consumable products and supply chain management services. Through our global facilities network and advanced information technology systems, we believe we offer unparalleled service to commercial airlines, business jet and defense OEMs, MRO operators and FBOs. With a large and diverse global customer base, including virtually all of the world’s commercial airlines, business jet and defense OEMs, OEM subcontractors and major MRO operators across five continents, we provide access to over one million SKUs. We serve as a distributor for every major aerospace fastener manufacturer. In order to support our vast range of custom products and services, we have invested over $100 in proprietary IT systems to create a superior technology platform. Our systems support both internal distribution processes and part attributes, along with customer services, including just-in-time (“JIT”) deliveries and kitting solutions, which we believe are unmatched by any competitor. This business is operated within our aerospace solutions group (“ASG”) segment.

 

In connection with the sales of its products, the Company also provides certain supply chain management services to certain of its customers. These services include the timely replenishment of products at the customer site, while also minimizing the customer’s on-hand inventory. These services are provided by the Company contemporaneously with the delivery of the product, and as such, once the product is delivered, the Company does not have a post-delivery obligation to provide services to the customer. The price of such services is generally included in the price of the products delivered to the customer, and revenue is recognized upon delivery of the product, at which point, the Company has satisfied its obligations to the customer. The Company does not account for these services as a separate element, as the services do not have stand-alone value and cannot be separated from the product element of the arrangement.

 

In 2013, we initiated an expansion into the energy services sector. Over the past two years, we have acquired seven companies in the business of providing technical services and related rental equipment to oil and gas exploration and production companies. As a result, we now provide a broad range of solutions and equipment, which bring value‑added resources to a new customer base, often in remote locations. Our customers include independent and major oil and gas companies that are engaged in the exploration and production of oil and gas properties in North America, including in the Northeast (Marcellus and Utica Shale), Rocky Mountains (Williston and Piceance Basins), Southwest (Permian Basin and Eagle Ford Shale) and Mid‑Continent. This business is operated within our energy services group (“ESG”) segment.

 

We conduct our operations through strategic business units that have been aggregated under two reportable segments: aerospace solutions group and energy services group.

 

15


 

Revenues by reportable segment for the three months ended April 30, 2015 and March 31, 2014, respectively, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

    

APRIL 30, 2015

    

MARCH 31, 2014

 

 

 

 

 

% of

 

 

 

% of

 

 

    

Revenues

    

Revenues

    

Revenues

    

Revenues

 

Aerospace solutions group

 

$

348.0 

 

80.6 

%  

$

326.4 

 

88.0 

%

Energy services group

 

 

83.5 

 

19.4 

%  

 

44.5 

 

12.0 

%

Total revenues

 

$

431.5 

 

100.0 

%  

$

370.9 

 

100.0 

%

 

Revenues by geographic area (based on destination) for the three months ended April 30, 2015 and March 31, 2014, respectively, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

APRIL 30, 2015

 

MARCH 31, 2014

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

    

Revenues

    

Revenues

    

Revenues

    

Revenues

 

United States

 

$

271.3 

 

62.9 

%  

$

223.3 

 

60.2 

%

Europe

 

 

98.4 

 

22.8 

%  

 

96.1 

 

25.9 

%

Asia, Pacific Rim,

 

 

61.8 

 

14.3 

%  

 

51.5 

 

13.9 

%

Middle East and other

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

431.5