10-Q 1 klxi-20170430x10q.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, 2017

 

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [  ] NO [X]

 

The registrant has one class of common stock, $0.01 par value, of which, 51,723,309 shares were outstanding as of May 23, 2017.

 

 


 

KLX INC.

 

Form 10-Q for the Quarter Ended April 30, 2017

 

Table of Contents

 

 

 

 

 

 

 

 

 

Page

Part I 

Financial Information

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of April 30, 2017 and January 31, 2017

3

 

 

 

 

Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three Months Ended April 30, 2017 and 2016

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2017 and 2016

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2. 

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

15

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 4. 

Controls and Procedures

22

 

Part II

 

Other Information

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 6. 

Exhibits

25

 

 

 

Signatures 

26

 

 

 

2


 

PART I - FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

KLX INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Millions, Except Share Data)

 

 

 

 

 

 

 

 

 

 

 

April 30, 

 

January 31,

 

 

 

2017

    

2017

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

269.1

 

$

277.3

 

Accounts receivable–trade, less allowance for doubtful accounts ($11.3 at April 30, 2017 and $13.5 at January 31, 2017)

 

 

306.6

 

 

261.3

 

Inventories, net

 

 

1,392.7

 

 

1,381.4

 

Other current assets

 

 

44.3

 

 

39.6

 

Total current assets

 

 

2,012.7

 

 

1,959.6

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation ($160.6 at April 30, 2017 and $149.4 at January 31, 2017)

 

 

250.8

 

 

248.3

 

Goodwill

 

 

999.9

 

 

996.4

 

Identifiable intangible assets, net

 

 

310.5

 

 

314.8

 

Deferred income taxes

 

 

146.5

 

 

147.0

 

Other assets

 

 

27.9

 

 

32.2

 

 

 

$

3,748.3

 

$

3,698.3

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

182.2

 

$

166.0

 

Accrued liabilities

 

 

106.1

 

 

91.1

 

Total current liabilities

 

 

288.3

 

 

257.1

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

1,182.6

 

 

1,182.0

 

Deferred income taxes

 

 

5.1

 

 

5.0

 

Other non-current liabilities

 

 

35.3

 

 

33.1

 

 

 

 

 

 

 

 

 

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; 53.5 million shares issued as of April 30, 2017 and 53.5 million shares issued as of January 31, 2017

 

 

0.5

 

 

0.5

 

Additional paid-in capital

 

 

2,691.9

 

 

2,686.5

 

Treasury stock: 1.8 million shares at April 30, 2017 and 1.5 million shares at January 31, 2017

 

 

(69.0)

 

 

(54.4)

 

Accumulated deficit

 

 

(307.7)

 

 

(328.0)

 

Accumulated other comprehensive loss

 

 

(78.7)

 

 

(83.5)

 

Total stockholders’ equity

 

 

2,237.0

 

 

2,221.1

 

 

 

$

3,748.3

 

$

3,698.3

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

 

KLX INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME (UNAUDITED)

(In Millions, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

April 30, 

 

April 30, 

 

 

 

2017

 

2016

 

Product revenues

 

$

347.5

 

$

315.8

 

Service revenues

 

 

63.8

 

 

37.0

 

Total revenues

 

 

411.3

 

 

352.8

 

Cost of sales - products

 

 

242.5

 

 

219.9

 

Cost of sales - services

 

 

55.9

 

 

49.4

 

Total cost of sales

 

 

298.4

 

 

269.3

 

Selling, general and administrative

 

 

64.3

 

 

60.3

 

Operating earnings

 

 

48.6

 

 

23.2

 

Interest expense

 

 

19.0

 

 

18.9

 

Earnings before income taxes

 

 

29.6

 

 

4.3

 

Income tax expense

 

 

11.2

 

 

1.8

 

Net earnings

 

$

18.4

 

$

2.5

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

4.8

 

 

21.0

 

Comprehensive income

 

$

23.2

 

$

23.5

 

Net earnings per share - basic

 

$

0.36

 

$

0.05

 

Net earnings per share - diluted

 

$

0.36

 

$

0.05

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


 

KLX INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Millions)

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

April 30, 

 

April 30, 

 

 

    

2017

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

 

Net earnings

 

$

18.4

 

$

2.5

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

16.5

 

 

16.6

 

Deferred income taxes

 

 

9.7

 

 

0.2

 

Non-cash compensation

 

 

5.9

 

 

4.8

 

Amortization of deferred financing fees

 

 

1.1

 

 

1.1

 

Provision for inventory write-downs

 

 

4.7

 

 

6.4

 

Change in allowance for doubtful accounts and sales returns

 

 

(2.2)

 

 

(0.3)

 

Loss on disposal of property and equipment

 

 

0.4

 

 

1.5

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

(43.0)

 

 

8.8

 

Inventories

 

 

(15.9)

 

 

(3.4)

 

Other current and non-current assets

 

 

(8.3)

 

 

4.8

 

Accounts payable

 

 

16.1

 

 

(2.6)

 

Other current and non-current liabilities

 

 

16.6

 

 

1.0

 

Net cash flows provided by operating activities

 

 

20.0

 

 

41.4

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(14.5)

 

 

(19.2)

 

Net cash flows used in investing activities

 

 

(14.5)

 

 

(19.2)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(14.5)

 

 

(3.3)

 

Net cash flows used in financing activities

 

 

(14.5)

 

 

(3.3)

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

0.8

 

 

2.3

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(8.2)

 

 

21.2

 

Cash and cash equivalents, beginning of period

 

 

277.3

 

 

427.8

 

Cash and cash equivalents, end of period

 

$

269.1

 

$

449.0

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

1.2

 

$

1.6

 

Interest

 

 

0.5

 

 

 -

 

 

 

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 (the “2016 Form 10-K”) for the fiscal year ended January 31, 2017 (“Fiscal 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. Certain items in the Company’s Condensed Consolidated Statements of Cash Flows have been reclassified for the quarter ended April 30, 2016 to conform to current year presentation.

 

Note 2.Recent Accounting Pronouncements

 

In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which eliminates a current exception in U.S. GAAP to the recognition of the income tax effects of temporary differences that result from intra-entity transfers of non-inventory assets. The intra-entity exception is being eliminated under the ASU. The standard is required to be applied on a modified retrospective basis and will be effective beginning with the first quarter of 2018.  Early adoption is permitted, and the Company adopted the new standard during the first quarter of 2017, which resulted in the elimination of a $7.7 long-term prepaid tax balance and the recognition of a $8.8 long-term deferred tax asset with the offset recorded to the accumulated deficit.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including that excess tax benefits and shortfalls be recorded as income tax benefit or expense in the income statement, rather than equity, and requires excess tax benefits from stock-based compensation to be classified in cash flow from operations. The Company adopted the new standard during the first quarter of 2017 in compliance with the effective date, which resulted in the recognition of a $0.5 long-term deferred tax asset with the offset recorded to accumulated deficit. Prior year periods have been adjusted to conform to the current year presentation. With respect to forfeitures, the Company will continue to estimate the number of awards expected to be forfeited upon award issuance.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which supersedes ASC Topic 840, Leases, and creates a new topic, ASC Topic 842, Leases. This update is effective for fiscal years beginning after December 15, 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

6


 

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 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 April 30, 2017, the Company finalized its valuation of inventory and intangible assets. The impact of the purchase price adjustments was not material to the Company’s financial statements.

 

Based on the Company’s final purchase price allocation, the excess of the purchase price of the fair value of the identifiable assets acquired approximated $119.6, of which $68.9 was allocated to identifiable intangible assets consisting of customer contracts and relationships and covenants not to compete and $50.7 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 April 30, 2017, and the results of operations are included in the accompanying condensed consolidated statements of earnings and comprehensive income from the date of acquisition.

 

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

7


 

 

 

 

 

 

Accounts receivable-trade

 

$

12.3

 

Inventories

 

 

103.8

 

Other current and non-current assets

 

 

3.7

 

Property and equipment

 

 

2.1

 

Goodwill

 

 

50.7

 

Identified intangibles

 

 

68.9

 

Accounts payable

 

 

(9.7)

 

Other current and non-current liabilities

 

 

(11.0)

 

Total consideration paid

 

$

220.8

 

 

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

 

On a pro forma basis to give effect to the Herndon acquisition as if it occurred on February 1, 2016, revenues, net earnings and earnings per diluted share for the three months ended April 30, 2016 were $397.0, $5.6 and $0.11, respectively.

 

The Company has substantially integrated Herndon into its Aerospace Solutions Group (“ASG”) segment systems. As a result, it is not practicable to report stand-alone revenues or operating earnings of the acquired business since the acquisition date.

 

 

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 $60.3 and $56.4 as of April 30, 2017 and January 31, 2017, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30, 2017

 

 

 

Useful Life

 

Original

 

Accumulated

 

Net Book

 

 

    

(Years)

    

Cost

    

Amortization

    

Value

 

Customer contracts and relationships

 

8

-

30

 

$

422.7

 

$

134.1

 

$

288.6

 

Covenants not to compete

 

5

 

 

5.5

 

 

3.7

 

 

1.8

 

Developed technologies

 

15

 

 

3.3

 

 

0.3

 

 

3.0

 

Trade names

 

Indefinite

 

 

17.1

 

 

 -

 

 

17.1

 

 

 

 

 

 

 

$

448.6

 

$

138.1

 

$

310.5

 

8


 

 

Amortization expense associated with identifiable intangible assets was approximately $4.8 and $4.7 for the three months ended April 30, 2017 and 2016, 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 $3.5 as compared to January 31, 2017 primarily as a result of foreign currency translation adjustments.

 

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. The Company entered into certain agreements with B/E Aerospace related to transition services and IT services through April 2017. 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. Expenses incurred under those agreements were not material for the three months ended April 30, 2017 and were $2.7 for the three months ended April 30, 2016.

 

On April 13, 2017, B/E Aerospace was sold to Rockwell Collins, Inc. and is no longer a related party. Sales to B/E Aerospace were $4.4 and $5.7 through April 12, 2017 and for the three months ended April 30, 2016, respectively.

 

Note 7.Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

April 30, 

 

January 31, 

 

 

 

2017

    

2017

 

Accrued salaries, vacation and related benefits

 

$

28.5

 

$

31.6

 

Accrued commissions

 

 

6.2

 

 

8.7

 

Income taxes payable

 

 

11.6

 

 

10.3

 

Accrued interest

 

 

29.4

 

 

11.7

 

Other accrued liabilities

 

 

30.4

 

 

28.8

 

 

 

$

106.1

 

$

91.1

 

 

 

 

 

 

 

 

Note 8.Long-Term Debt

 

As of April 30, 2017, 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 $1,182.6.  As of April 30, 2017, 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”).

 

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, 2017 or January 31, 2017.

 

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

9


 

payment of dividends and the repurchase of our stock, and conditions precedent for borrowings, all of which were met as of April 30, 2017.

 

Letters of credit issued under the Revolving Credit Facility aggregated $5.6 and $5.5 at April 30, 2017 and January 31, 2017, 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 April 30, 2017. 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 $1,260.0 and $1,260.7 as of April 30, 2017 and January 31, 2017, 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, 2017, future minimum lease payments under these arrangements approximated $110.7, 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 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.

10


 

The Company has employment agreements with certain key members of management with three year initial terms and which renew for one additional year on each anniversary date. 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 months ended April 30, 2017 and 2016 related to KLX restricted stock and stock options was $5.7 and $4.6, respectively. Unrecognized compensation expense related to these grants was $35.3 at April 30, 2017.

 

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 recognized during the three months ended April 30, 2017 and 2016 for this plan was $0.1 and $0.1, respectively.

 

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.

 

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

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

April 30, 

 

April 30, 

 

Revenues

    

2017

    

2016

 

Aerospace Solutions Group

 

$

347.5

 

$

315.8

 

Energy Services Group

 

 

63.8

 

 

37.0

 

Total revenues

 

 

411.3

 

 

352.8

 

Operating earnings (loss) (1)

 

 

 

 

 

 

 

Aerospace Solutions Group

 

 

58.7

 

 

54.1

 

Energy Services Group

 

 

(10.1)

 

 

(30.9)

 

Total operating earnings

 

 

48.6

 

 

23.2

 

Interest expense

 

 

19.0

 

 

18.9

 

Earnings before income taxes

 

$

29.6

 

$

4.3

 


(1)

Operating earnings (loss) include an allocation of employee benefits and general and administrative costs primarily based on the proportion of each segment’s number of employees for the three months ended April 30, 2017 and 2016.

11


 

The following table presents capital expenditures by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

April 30, 

 

April 30, 

 

 

  

2017

    

2016

 

Aerospace Solutions Group

 

$

2.7

 

$

2.8

 

Energy Services Group

 

 

11.8

 

 

16.4

 

 

 

$

14.5

 

$

19.2

 

 

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, 

 

 

    

2017

    

2017

 

Aerospace Solutions Group

 

$

999.9

 

$

996.4

 

Energy Services Group

 

 

 -

 

 

 -

 

 

 

$

999.9

 

$

996.4

 

 

The following table presents total assets by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

April 30, 

 

January 31, 

 

 

    

2017

    

2017

 

Aerospace Solutions Group

 

$

3,498.8

 

$

3,471.4

 

Energy Services Group

 

 

249.5

 

 

226.9

 

 

 

$

3,748.3

 

$

3,698.3

 

 

Corporate assets (primarily cash and cash equivalents) of $377.8 and $378.2 at April 30, 2017 and January 31, 2017, respectively, have been allocated to the above segments based on each segment’s percentage of total assets.

 

As discussed in Note 15. in the 2016 Form 10-K, Selected Quarterly Data (Unaudited), during our Fiscal 2016 preparation of the annual 10-K, the Company restated its April 30, 2016 interim financial statements to reflect the correction of errors that were identified related to the ASG segment’s product revenues and cost of sales. These errors related to the application of an accounting principle on claims related to the termination of programs under a long-term contract and other errors associated with inventory and sales reserves. The Company concluded the corrected errors were immaterial individually and in the aggregate, and the Company’s Condensed Consolidated Balance Sheet, Statement of Earnings and Comprehensive Income and Statement of Cash Flows reflect the correction of errors for the prior three-month period ended April 30, 2016. The impact of the restatement to the three-month period ended April 30, 2016 is summarized in the table below:

12


 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

As Reported

 

As Restated

 

 

    

April 30,

    

April 30,

    

 

 

2016

 

2016

 

Accounts receivable - trade

 

$

267.8

 

$

252.4

 

Inventories, net

 

 

1,284.0

 

 

1,293.5

 

Total stockholders' equity

 

 

2,234.0

 

 

2,230.4

 

Total revenues

 

 

368.2

 

 

352.8

 

Total cost of sales

 

 

278.7

 

 

269.3

 

Income tax expense

 

 

4.0

 

 

1.8

 

Net earnings

 

 

6.2

 

 

2.5

 

Net earnings per share - basic

 

 

0.12

 

 

0.05

 

Net earnings per share - diluted

 

 

0.12

 

 

0.05

 

 

 

 

 

 

 

 

 

 

 

The Statement of Cash Flows was restated to reflect the impact of these errors. In addition, the Company separately disclosed the provision for inventory write-downs in the Statement of Cash Flows which was previously included in the change in inventory line item. There were no changes in total operating, investing, or financing cash flows. The restated results for the three months ended April 30, 2016 include the correction of amounts relating to prior periods, which correction resulted in a reduction of revenue, cost of sales, and net earnings of $12.1, $6.6 and $3.4, respectively. The impact of these prior period errors was not material to the year ended January 31, 2017 or to any prior periods.

 

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 April 30, 2017 and 2016, approximately no shares and 0.2 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, 2017 and 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

April 30, 

 

April 30, 

 

 

    

2017

    

2016

 

Net earnings

 

$

18.4

    

$

2.5

  

(Shares in millions)

 

 

 

 

 

 

 

Basic weighted average common shares

 

 

51.1

 

 

52.0

 

Effect of dilutive securities - dilutive securities

 

 

0.7

 

 

0.2

 

Diluted weighted average common shares

 

 

51.8

 

 

52.2

 

 

 

 

 

 

 

 

 

Basic net earnings per common share

 

$

0.36

 

$

0.05

 

Diluted net earnings per common share

 

$

0.36

 

$

0.05

 

 

 

 

 

 

 

 

 

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 April 30, 2017 and 2016, the Company had $8.5 and $12.5, respectively, of uncertain tax positions, including accrued interest of $1.2 and $1.5 at April 30, 2017 and 2016, respectively, all of which would affect the Company’s effective tax rate if recognized.

 

13


 

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 2007-2014. The Company is currently undergoing a U.S. federal income tax examination for the period from December 17, 2014 through December 31, 2015.

 

 

14


 

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 months ended April 30, 2017 as compared to our results of operations for the three months ended April 30, 2016. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods.

 

As discussed in Note 15. Selected Quarterly Data (Unaudited) to our consolidated and combined financial statements contained in the 2016 Form 10-K, during our Fiscal 2016 preparation of the annual 10-K, the Company restated its April 30, 2016 interim financial statements to reflect the correction of errors that were identified. The Company concluded the corrected errors were immaterial individually and in the aggregate, and the Company’s Condensed Consolidated Balance Sheet, Statement of Earnings and Comprehensive Income and Statement of Cash Flows reflect the correction of errors for the prior three-month period ended April 30, 2016.

 

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, 2017, ASG’s global presence consisted of approximately 1.5 million square feet in 18 principal facilities with approximately 2,000 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 2016, we completed seven acquisitions, for an aggregate purchase price of approximately $2.1 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, and 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, 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

15


 

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 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 months ended April 30, 2017 and 2016, respectively, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

 

April 30, 2017

 

 

April 30, 2016

 

 

 

    

Revenues

    

%

    

 

Revenues

    

%

 

 

Aerospace Solutions Group

 

$

347.5

 

84.5

%  

 

$

315.8

 

89.5

%

 

Energy Services Group

 

 

63.8

 

15.5

%  

 

 

37.0

 

10.5

%

 

Total revenues

 

$

411.3

 

100.0

%  

 

$

352.8

 

100.0

%

 

 

Revenues by geographic area (based on destination) for the three months ended April 30, 2017 and 2016, respectively, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

 

    

April 30, 2017

 

 

April 30, 2016

 

 

 

 

Revenues

    

%

    

 

Revenues

    

%

 

 

United States

 

$

250.5

 

60.9

%  

 

$

195.7

 

55.5

%

 

Europe

 

 

97.2

 

23.6

%  

 

 

99.4

 

28.2

%

 

Asia, Pacific Rim, Middle East and other

 

 

63.6

 

15.5

%  

 

 

57.7

 

16.3

%

 

Total revenues

 

$

411.3

 

100.0

%  

 

$

352.8

 

100.0

%

 

 

Revenues from our domestic and foreign operations for the three months ended April 30, 2017 and 2016, respectively, were as follows:

 

 

 

 

 

 

 

 

 

 

 

April 30, 

 

April 30, 

 

 

    

2017

    

2016

    

Domestic

 

$

409.8

 

$

327.0

 

Foreign

 

 

1.5

 

 

25.8

 

Total revenues

 

$

411.3

 

$

352.8

 

 

 

We are organized based on the products and services we offer. The Company’s reportable segments which are also its operating segments, are comprised of ASG and ESG. We determined that ASG and ESG met the requirements of a reportable segment each operating in a single line of business. Each 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. Each operating segment has separate management teams and infrastructures dedicated to providing a full range of products and services to their customers.

 

 

 

 

 

16


 

Current ESG Industry Conditions

 

Over the past several years, the price of crude oil declined from over $100.00 per barrel in 2014 to approximately $50.00 at April 30, 2017, and as a result, over this period, oil field service companies that provide services similar to ESG have all suffered significant reductions in demand and pricing from their oil exploration and production customers.  This severe change in industry conditions resulted in a reduction of almost 800 oil rigs, a loss of almost 200,000 U.S. jobs throughout the energy sector and a corresponding decrease in demand and pricing for oil field services as the exploration and production (“E&P”) companies cut back their spending for new exploration.

 

We implemented a business alignment and cost reduction initiative in 2015 to size our operations to current demand levels. We began to see a stabilization in demand in late 2016, and during the first quarter of Fiscal 2017, ESG experienced a 72.4% increase in revenues versus the same period in the prior year, and an increase of 46.3% as compared to the fourth quarter of Fiscal 2016. We believe ESG’s first quarter performance reflects our business realignment and cost reduction initiatives as well as the improvement in industry conditions. We are continuing to carefully manage our costs, while continuing to invest in differentiating technologies, personnel and innovative product and service lines, as we build an industry leading platform in the services niche in which we operate.

 

17


 

RESULTS OF OPERATIONS

 

THREE MONTHS ENDED APRIL 30, 2017

COMPARED TO THREE MONTHS ENDED APRIL 30, 2016

($ in Millions, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

THREE MONTHS ENDED

 

Percent

 

 

 

 

April 30, 2017

 

April 30, 2016

 

Change

 

 

Aerospace Solutions Group

 

$

347.5

 

$

315.8

 

10.0

%

 

Energy Services Group

 

 

63.8

 

 

37.0

 

72.4

%

 

Total revenues

 

$

411.3

 

$

352.8

 

16.6

%

 

 

 

First quarter 2017 revenues of $411.3 increased 16.6% as compared with the prior year. Our consolidated revenue growth was driven by a 10.0% increase in ASG revenues and a 72.4% increase in ESG revenues.

 

First quarter 2017 cost of sales was $298.4, or 72.6% of sales, as compared to the prior year period of $269.3, or 76.3% of sales. The year-over-year improvement in cost of sales as a percentage of revenues is primarily due to substantially improved results at our ESG business due to improved industry conditions and the benefits from our ESG cost reduction initiatives.

 

Selling, general and administrative (“SG&A”) expense during the first quarter of 2017 was $64.3, or 15.6% of revenues, as compared with $60.3, or 17.1% of revenues, in the prior year period. SG&A, as a percentage of revenues, decreased as compared with the prior year period by 150 basis points primarily due to increased operating leverage at ESG, which grew revenues by 72.4% while SG&A only increased 2.7%.

 

Operating earnings of $48.6 increased $25.4, or 109.5%. Operating margin improved 520 basis points to 11.8% driven by improved performance by our ESG business slightly offset by the impact of lower margins at ASG resulting from the inclusion of lower margin Herndon results for the first quarter of 2017.

 

Interest expense for the three months ended April 30, 2017 was $19.0 as compared to $18.9 in the prior year period.

 

Income tax expense for the three months ended April 30, 2017 was $11.2, or 37.8% of earnings before income taxes, as compared with an income tax expense of $1.8 in the prior year period.

 

Net earnings and net earnings per share for the three months ended April 30, 2017 were $18.4 and $0.36, respectively, as compared to $2.5 and $0.05, respectively, in 2016. The changes in net earnings are due to the various factors discussed above. 

 

 

Segment Results

 

The following is a summary of operating earnings (loss) by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

Percent

 

 

 

 

April 30, 2017

 

April 30, 2016

 

Change

 

 

Aerospace Solutions Group

 

$

58.7

 

$

54.1

 

8.5

%

 

Energy Services Group

 

 

(10.1)

 

 

(30.9)

 

67.3

%

 

Total operating earnings

 

$

48.6

 

$

23.2

 

109.5

%

 

 

For the three months ended April 30, 2017, ASG revenues of $347.5 increased 10.0% compared to the same period in the prior year. Revenue growth was driven primarily by an increase in military aftermarket

18


 

demand. ASG operating earnings of $58.7 were up 8.5% as compared to the same period in the prior year. ASG operating margin of 16.9% declined 20 basis points reflecting the lower, but improving, margins associated with the Herndon business along with integration related expenses.