10-Q 1 klx-20161031x10q.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 October 31, 2016

 

 

Commission File No. 001-36610

 

 

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 [X] Accelerated filer [  ] Non-accelerated filer (do not check if a smaller reporting company) [  ] 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, 52,508,734 shares were outstanding as of December 6, 2016.

 

 


 

KLX INC.

 

Form 10-Q for the Quarter Ended October 31, 2016

 

Table of Contents

 

 

 

 

 

 

 

 

 

Page

Part I 

Financial Information

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of October 31, 2016 and January 31, 2016

 

 

 

 

Condensed Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the Three and Nine Months Ended October 31, 2016 and 2015

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2016 and 2015

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

Item 2. 

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

14 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

24 

 

 

 

Item 4. 

Controls and Procedures

24 

 

Part II

 

Other Information

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

25 

 

 

 

Item 6. 

Exhibits

26 

 

 

 

Signatures 

27 

 

 

 

2


 

PART I - FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

KLX INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Millions, Except Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

January 31, 

 

 

 

    

2016

    

2016

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

297.7

 

$

427.8

 

 

Accounts receivable–trade, less allowance for doubtful accounts ($11.2 at October 31, 2016 and $11.3 at January 31, 2016)

 

 

294.0

 

 

259.6

 

 

Inventories, net

 

 

1,362.1

 

 

1,295.3

 

 

Other current assets

 

 

34.7

 

 

40.1

 

 

Total current assets

 

 

1,988.5

 

 

2,022.8

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation ($140.3 at October 31, 2016 and $109.3 at January 31, 2016)

 

 

257.4

 

 

260.5

 

 

Goodwill

 

 

993.3

 

 

954.9

 

 

Identifiable intangible assets, net

 

 

320.3

 

 

262.7

 

 

Deferred income taxes

 

 

147.0

 

 

163.4

 

 

Other assets

 

 

22.1

 

 

26.7

 

 

 

 

$

3,728.6

 

$

3,691.0

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

158.0

 

$

145.9

 

 

Accrued liabilities

 

 

109.3

 

 

115.3

 

 

Total current liabilities

 

 

267.3

 

 

261.2

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

1,181.3

 

 

1,179.5

 

 

Deferred income taxes

 

 

6.5

 

 

16.2

 

 

Other non-current liabilities

 

 

36.0

 

 

31.6

 

 

 

 

 

 

 

 

 

 

 

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; 53.3 million shares issued as of October 31, 2016 and 53.3 million shares issued as of January 31, 2016

 

 

0.5

 

 

0.5

 

 

Additional paid-in capital

 

 

2,678.1

 

 

2,662.4

 

 

Treasury stock: 0.8 million shares at October 31, 2016 and 0.4 million shares at January 31, 2016

 

 

(23.0)

 

 

(12.5)

 

 

Accumulated deficit

 

 

(338.4)

 

 

(373.7)

 

 

Accumulated other comprehensive loss

 

 

(79.7)

 

 

(74.2)

 

 

Total stockholders’ equity

 

 

2,237.5

 

 

2,202.5

 

 

 

 

$

3,728.6

 

$

3,691.0

 

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

 

KLX INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In Millions, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

Product revenues

 

$

348.8

 

$

306.7

 

$

1,039.0

 

$

1,006.4

 

Service revenues

 

 

40.2

 

 

58.3

 

 

109.6

 

 

202.8

 

Total revenues

 

 

389.0

 

 

365.0

 

 

1,148.6

 

 

1,209.2

 

Cost of sales - products

 

 

244.2

 

 

213.7

 

 

728.0

 

 

705.7

 

Cost of sales - services

 

 

44.8

 

 

65.4

 

 

136.0

 

 

212.6

 

Total cost of sales

 

 

289.0

 

 

279.1

 

 

864.0

 

 

918.3

 

Selling, general and administrative

 

 

61.4

 

 

65.0

 

 

181.9

 

 

189.7

 

Goodwill impairment charge

 

 

 -

 

 

310.4

 

 

 -

 

 

310.4

 

Long-lived asset impairment charge

 

 

 -

 

 

329.8

 

 

 -

 

 

329.8

 

Operating earnings (loss)

 

 

38.6

 

 

(619.3)

 

 

102.7

 

 

(539.0)

 

Interest expense

 

 

18.8

 

 

19.0

 

 

56.8

 

 

58.2

 

Earnings (loss) before income taxes

 

 

19.8

 

 

(638.3)

 

 

45.9

 

 

(597.2)

 

Income tax expense (benefit)

 

 

 -

 

 

(237.5)

 

 

10.3

 

 

(221.7)

 

Net earnings (loss)

 

$

19.8

 

$

(400.8)

 

$

35.6

 

$

(375.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(10.8)

 

 

(0.4)

 

 

(5.5)

 

 

(6.6)

 

Comprehensive income (loss)

 

$

9.0

 

$

(401.2)

 

$

30.1

 

$

(382.1)

 

Net earnings (loss) per share - basic

 

$

0.38

 

$

(7.68)

 

$

0.69

 

$

(7.19)

 

Net earnings (loss) per share - diluted

 

$

0.38

 

$

(7.68)

 

$

0.68

 

$

(7.19)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


 

KLX INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Millions)

 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED

 

 

 

OCTOBER 31,

 

OCTOBER 31,

 

 

    

2016

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

 

Net earnings (loss)

 

$

35.6

 

$

(375.5)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

50.6

 

 

59.8

 

Deferred income taxes

 

 

6.5

 

 

(226.6)

 

Asset impairment charge

 

 

 -

 

 

640.2

 

Non-cash compensation

 

 

14.7

 

 

10.9

 

Amortization of deferred financing fees

 

 

3.2

 

 

2.9

 

Tax impact from prior sales of restricted stock

 

 

 -

 

 

(0.9)

 

Provision for doubtful accounts

 

 

(0.1)

 

 

0.9

 

Loss on disposal of property, equipment and other

 

 

4.3

 

 

2.8

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

(22.2)

 

 

33.6

 

Inventories

 

 

35.3

 

 

9.0

 

Other current and non-current assets

 

 

9.3

 

 

4.7

 

Accounts payable

 

 

2.7

 

 

(0.1)

 

Other current and non-current liabilities

 

 

(0.8)

 

 

35.8

 

Net cash flows provided by operating activities

 

 

139.1

 

 

197.5

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(33.9)

 

 

(106.4)

 

Acquisitions, net of cash acquired

 

 

(220.8)

 

 

1.0

 

Net cash flows used in investing activities

 

 

(254.7)

 

 

(105.4)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(13.5)

 

 

(0.1)

 

Cash proceeds from stock issuance

 

 

0.8

 

 

0.7

 

Tax impact from prior sales of restricted stock

 

 

 -

 

 

0.9

 

Deferred acquisition payments

 

 

 -

 

 

(90.8)

 

Net cash flows used in financing activities

 

 

(12.7)

 

 

(89.3)

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(1.8)

 

 

(1.0)

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(130.1)

 

 

1.8

 

Cash and cash equivalents, beginning of period

 

 

427.8

 

 

447.2

 

Cash and cash equivalents, end of period

 

$

297.7

 

$

449.0

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

4.1

 

$

9.1

 

Interest

 

 

36.4

 

 

35.2

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

KLX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - In Millions, Except Per Share Data)

 

Note 1.Description of Business and Basis of Presentation

 

The accompanying unaudited condensed consolidated 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 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 financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the KLX Inc. (the “Company” or “KLX”) Annual Report on Form 10-K for the fiscal year ended January 31, 2016.

 

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.

 

Note 2.Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those years. Earlier adoption is permitted. The Company is currently evaluating the effect this update will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which supersedes ASC Topic 840, Leases, and creates a new topic, ASC Topic 842, Leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Earlier adoption is permitted. ASU 2016-02 requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect of this update on its consolidated financial statements.

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, which updated the guidance in ASC Topic 606, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in this update deferred the effective date for implementation of ASU 2014-09 by one year and is now effective for annual reporting periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period.  In April 2016, FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and

6


 

Licensing, and in May 2016, ASU 2016-12, Revenues from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients both of which provide supplemental adoption guidance and clarification to ASU 2014-09. ASU 2016-10 and ASU 2016-12 must be adopted concurrently with the adoption of ASU 2014-09. The Company has not determined the impact this guidance will have on the financial statements.  However, the identification of implementation project team members and the inventorying of contracts with customers, particularly large customer contracts, has begun. Other than increased disclosures, the impact of the revised accounting guidance to the results of operations and cash flows of the Company cannot be determined until the assessment process is complete.

 

 

 

Note 3.Business Combinations

 

On May 17, 2016, the Company acquired Herndon Aerospace & Defense LLC (“Herndon”), an aftermarket aerospace supply chain management and consumables hardware distributor servicing principally aftermarket military depots as well as the commercial aerospace aftermarket for an aggregate purchase price of $220.8 (net of cash acquired). During the quarter ended October 31, 2016, Herndon’s acquired working capital was finalized resulting in a reduction in purchase price of $0.7 and customary working capital adjustments as of the closing date which were not material individually or in the aggregate. Additionally, the Company adjusted the allocation of the Herndon purchase price to increase intangible assets by $16.4 and decrease goodwill and inventories by $14.2 and $3.0, respectively, related to the Company’s preliminary purchase price allocation. The impact of the purchase price adjustment to the Company’s condensed consolidated statement of earnings from the date of acquisition was not material.

 

Based on the Company’s preliminary purchase price allocation, the excess of the purchase price of the fair value of the identifiable assets acquired approximated $113.6, of which $68.9 was allocated to identifiable intangible assets consisting of customer contracts and relationships and covenants not to compete, and $44.7 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.

 

The Herndon acquisition was accounted for as a purchase under FASB ASC 805, Business Combinations. The assets acquired and liabilities assumed have been reflected in the accompanying condensed consolidated balance sheet as of October 31, 2016 and the results of operations are included in the accompanying condensed consolidated statements of earnings and comprehensive income from the date of acquisition. The valuation of certain assets, principally intangible assets and inventories, is not yet complete, and as such, the Company has not yet finalized its allocation of the purchase price for the acquisition.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Accounts receivable-trade

 

$

12.3

 

Inventories

 

 

103.2

 

Other current and non-current assets

 

 

1.1

 

Property and equipment

 

 

2.3

 

Goodwill

 

 

44.7

 

Identified intangibles

 

 

68.9

 

Accounts payable

 

 

(9.7)

 

Other current and non-current liabilities

 

 

(2.0)

 

Total consideration paid

 

$

220.8

 

 

The majority of goodwill and intangible assets are expected to be deductible for tax purposes.

 

7


 

On a pro forma basis to give effect to the Herndon acquisition as if it occurred on February 1, 2015, revenues, net earnings (loss) and earnings (loss) per diluted share for the three months ended October 31, 2015 and the nine months ended October 31, 2016 and 2015 were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

NINE MONTHS ENDED

 

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

 

2016

 

2015

 

2016

 

2015

 

 

As Reported

 

Pro forma

    

Pro forma

 

Pro forma

  

Revenues

$

389.0

 

$

399.5

 

$

1,198.8

 

$

1,309.3

 

Net earnings (loss)

 

19.8

 

 

(398.4)

 

 

39.1

 

 

(368.6)

 

Earnings (loss) per diluted share

 

0.38

 

 

(7.63)

 

 

0.75

 

 

(7.06)

 

 

 

The Company has begun integrating Herndon into its Aerospace Solutions Group (“ASG”) segment systems. As a result, it is not practicable to report stand-alone operating earnings of the acquired business since the acquisition date, and going forward it will not be practicable to report stand-alone revenues of the acquired business. Revenues from Herndon from the acquisition date of May 17, 2016 through October 31, 2016 were $56.7.

 

 

Note 4.Inventories

 

Inventories, made up of finished goods, consist primarily 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 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. In accordance with industry practice, inventories include amounts relating to long-term contracts with long production cycles, some of which are not expected to be realized within one year. In addition, the Company supports a substantial portion of the global fleet of aircraft in service, and in its capacity as a stocking distributor will acquire and hold inventories for aircraft maintenance at periodic intervals as mandated by the Federal Aviation Administration (“FAA”) or similar regulatory agencies. Based on historical experience, the support of the aftermarket activities with products such as those which the Company sells will necessitate holding inventory in excess of the amount required to support new build production activity contracts.  Obsolescence has historically been immaterial for the Company due to the long life of an aircraft and nature of the products sold by the Company. Inventory with a limited shelf life is continually monitored and reserved for in advance of expiration. The annual provision for inventory with limited shelf life has historically been immaterial. Reserves for excess and obsolete inventory were approximately $47.8 and $40.4 as of October 31, 2016 and January 31, 2016, respectively.

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2016

 

 

 

Useful Life

 

Original

 

Accumulated

 

Net Book

 

 

    

(Years)

    

Cost

    

Amortization

    

Value

  

Customer contracts and relationships

 

8

-

30

 

$

422.5

 

$

124.6

 

$

297.9

 

Covenants not to compete

 

4

-

5

 

 

5.5

 

 

3.4

 

 

2.1

 

Developed technologies

 

15

 

 

3.3

 

 

0.2

 

 

3.1

 

Trade names

 

Indefinite

 

 

17.2

 

 

 -

 

 

17.2

 

 

 

 

 

 

 

$

448.5

 

$

128.2

 

$

320.3

 

 

Amortization expense associated with identifiable intangible assets was approximately $4.8 and $5.8 for the three months ended October 31, 2016 and 2015, respectively, and $14.7 and $19.1 for the nine

8


 

months ended October 31, 2016 and 2015, respectively. The Company currently expects to recognize amortization expense of approximately $20.0 in each of the next five fiscal years (primarily related to our ASG business). The future amortization amounts are estimates. Actual future amortization expense may be different due to finalization of purchase price allocations of acquisitions, 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 increased by $38.4 as compared to January 31, 2016 primarily as a result of the May 17, 2016 acquisition of Herndon by the ASG segment.

 

The fair value of the ASG reporting unit exceeded the carrying value by approximately 16% as of December 31, 2015, and approximately $993.3 of goodwill has been allocated to the ASG reporting unit as of October 31, 2016. ASG's cash flow projections were a significant input into the December 31, 2015 reporting unit fair value. Should ASG’s future cash from operations decline to levels inconsistent with ASG’s projected results, long-term projections may be adjusted downward, which could result in an impairment charge at the ASG reporting unit.

 

Note 6. Related Party Transactions

 

On December 17, 2014, B/E Aerospace, Inc. ( “B/E Aerospace”) created an independent public company through a spin-off of its ASG and Energy Services Group (“ESG”) businesses to B/E Aerospace’s stockholders (“Spin-Off”).  Following the Spin-Off, the Company created in-house substantially all of the functions that were previously provided to it by B/E Aerospace. In addition, the Company has entered into certain agreements with B/E Aerospace relating to transition services and IT services for a transitional period of approximately 24 months following the Spin-Off. In addition, the Company entered into an employee matters agreement and a tax sharing and indemnification agreement with B/E Aerospace 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 B/E Aerospace and does not constitute significant continuing support of KLX’s operations. Expenses incurred under those agreements totaled $2.1 and $2.7 for the three months ended October 31, 2016 and 2015, respectively, and $7.1 and $8.8 for the nine months ended October 31, 2016 and 2015, respectively. As of October 31, 2016, the Company has recorded a tax indemnity payable to B/E Aerospace totaling $4.7, of which $0.1 is classified in other current liabilities and $4.6 is classified in other long term liabilities.

 

Sales to B/E Aerospace were $5.4 and $5.1 for the three months ended October 31, 2016 and 2015, respectively, and $18.6 and $14.4 for the nine months ended October 31, 2016 and 2015, respectively.

 

Note 7.Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

October 31, 2016

    

January 31, 2016

 

Accrued salaries, vacation and related benefits

 

$

30.1

 

$

28.7

 

Accrued commissions

 

 

7.5

 

 

6.2

 

Income taxes payable

 

 

4.3

 

 

11.4

 

Accrued interest

 

 

29.4

 

 

11.7

 

Other accrued liabilities

 

 

38.0

 

 

57.3

 

 

 

$

109.3

 

$

115.3

 

 

 

 

 

 

 

 

Note 8.Long-Term Debt

 

As of October 31, 2016, 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”). On a net basis, after taking into consideration the debt issue costs for the Term Loan Facility, total debt was $1,181.3.  As of October 31, 2016, the Company also had a $750.0 undrawn secured revolving credit facility pursuant to a credit agreement dated as of December 16, 2014 and amended and restated on May 19, 2015 (the “Revolving Credit Facility”).

9


 

 

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 October 31, 2016.

 

The Revolving Credit Facility is tied to a borrowing base formula and has no maintenance financial covenants.  This Revolving Credit Facility matures in May 2020. The credit agreement is collateralized by the Company’s assets and contains customary affirmative covenants, negative covenants, restrictions on the payment of dividends and the repurchase of our stock, and conditions precedent for borrowings, all of which were met as of October 31, 2016.

 

Letters of credit issued under the Revolving Credit Facility aggregated $4.8 and $3.2 at October 31, 2016 and 2015, respectively.

 

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 October 31, 2016. The fair value of the Company’s 5.875% Notes, based on market prices for publicly-traded debt (which the Company classifies as Level 2 inputs), was $1,218.2 and $1,136.4 as of October 31, 2016 and January 31, 2016, 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 October 31, 2016, future minimum lease payments under these arrangements approximated $90.9, 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 consolidated financial statements.

 

Indemnities, Commitments and Guarantees - During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to other parties to certain acquisition agreements. The duration of these indemnities, commitments and guarantees varies, and in

10


 

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 consolidated 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.

 

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, 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 and nine months ended October 31, 2016 and 2015 related to KLX restricted stock and stock options was $4.8 and $3.5, and $14.3 and $10.6, respectively. Unrecognized compensation expense related to these grants was $32.5 at October 31, 2016.

 

KLX has established a qualified Employee Stock Purchase Plan, the terms of which allow for qualified employees (as defined in the Plan) to participate in the purchase of designated shares of KLX’s common stock at a price equal to 85% of the closing price on the last business day of each semiannual 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.

 

Note 12.Segment Reporting

 

The Company is organized based on the products and services it offers. The Company’s reportable segments which are also its operating segments, are comprised of ASG and ESG. The segments regularly report their results of operations and make requests for capital expenditures and acquisition funding to the Company’s chief operational decision-making group (“CODM”). This group is comprised of the Chairman and Chief Executive Officer and the President and Chief Operating Officer. As a result, the CODM has determined the Company has two reportable segments.

 

11


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

Revenues

    

2016

    

2015

    

2016

    

2015

 

Aerospace Solutions Group

 

$

348.8

 

$

306.7

 

$

1,039.0

 

$

1,006.4

 

Energy Services Group

 

 

40.2

 

 

58.3

 

 

109.6

 

 

202.8

 

Total revenues

 

 

389.0

 

 

365.0

 

 

1,148.6

 

 

1,209.2

 

Operating earnings (loss) (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace Solutions Group

 

 

56.5

 

 

47.8

 

 

174.9

 

 

167.7

 

Energy Services Group

 

 

(17.9)

 

 

(667.1)

 

 

(72.2)

 

 

(706.7)

 

Total operating earnings (loss)

 

 

38.6

 

 

(619.3)

 

 

102.7

 

 

(539.0)

 

Interest expense

 

 

18.8

 

 

19.0

 

 

56.8

 

 

58.2

 

Earnings (loss) before income taxes

 

$

19.8

 

$

(638.3)

 

$

45.9

 

$

(597.2)

 


(1)

Operating earnings (loss) include an allocation of employee benefits and general and administrative costs based on the proportion of each segment’s number of employees for the three and nine months ended October 31, 2016 and revenues for the three and nine months ended October 31, 2015.

The following table presents capital expenditures by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

 

    

2016

    

2015

    

2016

    

2015

 

Aerospace Solutions Group

 

$

4.1

 

$

11.9

 

$

10.4

 

$

23.4

 

Energy Services Group

 

 

4.5

 

 

24.4

 

 

23.5

 

 

83.0

 

 

 

$

8.6

 

$

36.3

 

$

33.9

 

$

106.4

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

January 31, 

 

 

    

2016

    

2016

 

Aerospace Solutions Group

 

$

993.3

 

$

952.4

 

Energy Services Group

 

 

 -

 

 

2.5

 

 

 

$

993.3

 

$

954.9

 

 

The following table presents total assets by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

January 31, 

 

 

    

2016

    

2016

 

Aerospace Solutions Group

 

$

3,496.0

 

$

3,422.8

 

Energy Services Group

 

 

232.6

 

 

268.2

 

 

 

$

3,728.6

 

$

3,691.0

 

 

Corporate assets (primarily cash and cash equivalents) of $411.9 and $559.5 at October 31, 2016 and January 31, 2016, respectively, have been allocated to the above segments based on each segment’s percentage of total assets.

 

12


 

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 LTIP and restricted shares based on an average share price during the period. For the three months ended October 31, 2016 and 2015, approximately 0.4 and no shares and for the nine months ended October 31, 2016 and 2015, approximately 0.3 and no 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 and nine months ended October 31, 2016 and 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

 

    

2016

    

2015

    

2016

    

2015

 

Net earnings (loss)

    

$

19.8

    

$

(400.8)

 

$

35.6

    

$

(375.5)

  

(Shares in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

 

51.8

 

 

52.2

 

 

51.9

 

 

52.2

 

Effect of dilutive securities - dilutive securities

 

 

0.4

 

 

 -

 

 

0.3

 

 

 -

 

Diluted weighted average common shares

 

 

52.2

 

 

52.2

 

 

52.2

 

 

52.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings (loss) per common share

 

$

0.38

 

$

(7.68)

 

$

0.69

 

$

(7.19)

 

Diluted net earnings (loss) per common share

 

$

0.38

 

$

(7.68)

 

$

0.68

 

$

(7.19)

 

 

 

 

 

 

 

 

 

Note 14.Income Taxes

 

In accordance with FASB ASC 740, Income Taxes, 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 October 31, 2016 and 2015, the Company had $12.3 and $10.3, respectively, of uncertain tax positions, including accrued interest of $1.7 and $1.1 at October 31, 2016 and 2015, respectively, all of which would affect the Company’s effective tax rate if recognized. During the quarter, the Company determined that certain loss carryforwards, previously reserved in the Company’s valuation allowance, would no longer require a reserve as we realized a one-time benefit from our ongoing tax planning initiatives. The release of valuation allowance with respect to these loss carryforwards resulted in a tax benefit for the quarter. The tax benefit netted against the Company’s tax expense on book income for the quarter, which resulted in no tax expense for the quarter.

 

As a result, the Company now expects an effective tax rate of approximately 27.5% for the year ending January 31, 2017. 

 

Pursuant to the terms of the Tax Sharing Agreement with our former parent, B/E Aerospace, the Company may be liable for income tax in certain foreign jurisdictions arising from the examination of tax years during which the Company was part of the B/E Group.  The statute of limitations in these foreign jurisdictions is open for tax years 2007-2015. The Company is currently undergoing a U.S. federal income tax examination for the period from December 17, 2014 through December 31, 2015.

 

 

 

13


 

ITEM 2. MANAGEMENT’S 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 and nine months ended October 31, 2016 as compared to our results of operations for the three and nine months ended October 31, 2015. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods.

 

We believe, based on our experience in the industry, that we are a leading distributor and value‑added service provider of aerospace fasteners and consumables, and that we offer one of the broadest ranges of aerospace hardware, consumables and inventory management services worldwide. Founded in 1974 as M&M Aerospace Hardware, our Aerospace Solutions Group (“ASG”), formerly the consumables management segment of B/E Aerospace, has evolved into an industry leader through multiple acquisitions and strong organic growth. As of January 31, 2016, ASG’s global presence consisted of more than 1.4 million square feet in 17 principal facilities with approximately 1,900 employees worldwide. We have substantially expanded the size, scope and nature of our business as a result of a number of acquisitions. B/E Aerospace acquired M&M in 2001. Between 2002 and 2012, we completed six acquisitions, for an aggregate purchase price of approximately $1.9 billion. We believe our organic growth together with these acquisitions enabled us to position ourselves as a preferred global supplier to our customers. We believe we have become an industry leader providing 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 original equipment manufacturers (“OEMs”), maintenance, repair and overhaul (“MRO”) operators, and fixed base operators (“FBOs”). We have a large and diverse global customer base, including commercial airlines, business jet and defense OEMs, OEM subcontractors and major MRO operators across five continents, we provide access to over one million stock keeping units (“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. In addition, through the acquisition of Herndon Aerospace & Defense LLC (“Herndon”) in May 2016 for $220.8 net of cash acquired, we expanded our capability to provide comprehensive supply chain management solutions to a broader portfolio of aftermarket customers. Herndon has established itself within the Department of Defense and its procurement arm, the Defense Logistics Agency, as a proven supplier of a broad range of consumables resulting in a number of long-term contracts with major military installations. We believe Herndon’s unique land-based military depot aftermarket product distribution platform will serve as an excellent new growth platform for ASG. The aforementioned operating business is operated within our ASG segment.

 

ASG 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 ASG contemporaneously with the delivery of the product, and as such, once the product is delivered, ASG 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, ASG has satisfied its obligations to the customer. We do 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. During 2013 and 2014, we acquired seven companies engaged 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

14


 

exploration and production of oil and gas in North America, including in the Northeast (Marcellus and Utica Shales), 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.

 

Revenues by reportable segment for the three and nine months ended October 31, 2016 and 2015, respectively, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

NINE MONTHS ENDED

 

 

 

October 31, 2016

 

October 31, 2015

 

 

October 31, 2016

 

October 31, 2015

 

 

    

Revenues

    

%

    

Revenues

    

%

 

    

Revenues

    

%

    

Revenues

    

%

 

Aerospace Solutions Group

 

$

348.8

 

89.7

%  

$

306.7

 

84.0

%

 

$

1,039.0

 

90.5

%  

$

1,006.4

 

83.2

%

Energy Services Group

 

 

40.2

 

10.3

%  

 

58.3

 

16.0

%

 

 

109.6

 

9.5

%  

 

202.8

 

16.8

%

Total revenues

 

$

389.0

 

100.0

%  

$

365.0

 

100.0

%

 

$

1,148.6

 

100.0

%  

$

1,209.2