10-K 1 klxi-20180131x10k.htm 10-K klx_Current_Folio_10K

                                                                                                                                                                                                     

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10‑K


 

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended: January 31, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number: 001‑36610

KLX INC.

(Exact name of registrant as specified in its charter)


 

 

Delaware
(State of incorporation
or organization)

47‑1639172
(I.R.S. Employer Identification No.)

1300 Corporate Center Way,

Wellington, Florida

(Address of principal executive offices)

(561) 383‑5100

(Registrant’s telephone number, including area code)

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

 

 

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, $0.01 Par Value

The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒  No ☐.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒  No ☐.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 ☒  No ☐.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

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 ☒.

As of July 31, 2017 the aggregate market value of the registrant’s voting stock held by non‑affiliates was approximately $2,614 million. Shares of common stock held by executive officers and directors have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not a determination for any other purpose. The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of March 13, 2018 was 50,740,101 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the registrant’s Proxy Statement to be filed with the Commission in connection with the 2018 Annual Meeting of Stockholders or Annual Report on Form 10‑K/A, to be filed with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year, are incorporated by reference in Part III of this Form 10‑K. With the exception of those sections that are specifically incorporated by reference in this Annual Report on Form 10‑K, such Proxy Statement shall not be deemed filed as part of this Report or incorporated by reference herein.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

PART I

 

ITEM 1. 

Business

4

ITEM 1A. 

Risk Factors

16

ITEM 1B. 

Unresolved Staff Comments

36

ITEM 2. 

Properties

36

ITEM 3. 

Legal Proceedings

38

ITEM 4. 

Mine Safety Disclosures

38

 

PART II

 

ITEM 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

39

ITEM 6. 

Selected Financial Data

41

ITEM 7. 

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

43

ITEM 7A. 

Quantitative and Qualitative Disclosures About Market Risk

54

ITEM 8. 

Financial Statements and Supplementary Data

55

ITEM 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

55

ITEM 9A. 

Controls and Procedures

55

ITEM 9B. 

Other Information

57

 

PART III

 

ITEM 10. 

Directors, Executive Officers and Corporate Governance

57

ITEM 11. 

Executive Compensation

63

ITEM 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

63

ITEM 13. 

Certain Relationships and Related Party Transactions, and Director Independence

63

ITEM 14. 

Principal Accountant Fees and Services

63

 

PART IV

 

ITEM 15. 

Exhibits and Financial Statement Schedules

64

 

Signatures

67

 

Index to Consolidated and Combined Financial Statements and Schedule

F‑1

 

 

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CAUTIONARY STATEMENT REGARDING FORWARD‑LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward‑looking statements to encourage companies to provide prospective information to investors. This Annual Report on Form 10‑K (this “Form 10‑K”) includes forward‑looking statements that reflect our current expectations and projections about our future results, performance and prospects. Forward‑looking statements include all statements that are not historical in nature or are not current facts. We have tried to identify these forward‑looking statements by using forward‑looking words including “believe,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” “may,” “might,” “should,” “could,” “will” or the negative of these terms or similar expressions.

These forward‑looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause our actual results, performance and prospects to differ materially from those expressed in, or implied by, these forward‑looking statements. These factors include the risks, uncertainties, assumptions and other factors discussed under the headings “Item 1A. Risk Factors,” as well as “Item 1. Business”, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10‑K, including the following factors:

·

regulation of and dependence upon the aerospace and energy industries;

·

the cyclical nature of the aerospace and energy industries;

·

market prices for fuel, oil and natural gas;

·

competitive conditions;

·

potential disruptions in our business from the announced review of strategic alternatives, including a potential sale of KLX or a sale of a division or divisions thereof, and the decision to engage or not in any strategic alternative;

·

legislative or regulatory changes and potential liability under federal and state laws and regulations;

·

risks inherent in international operations, including compliance with anti‑corruption laws and regulations of the U.S. government and various international jurisdictions;

·

doing business with the U.S. government;

·

reduction in government military spending;

·

just in time (“JIT”) contracts and long term agreements (“LTAs”) having no guarantee of future customer purchase requirements;

·

dependence on suppliers and on third‑party package delivery companies;

·

decreases in the rate at which oil or natural gas reserves are discovered or developed;

·

impact of technological advances on the demand for our products and services;

·

delays of customers obtaining permits for their operations;

·

hazards and operational risks that may not be fully covered by insurance;

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·

the write‑off of a significant portion of intangible assets;

·

the need to obtain additional capital or financing, and the availability and/or cost of obtaining such capital or financing;

·

limitations that our organizational documents, debt instruments and U.S. federal income tax requirements may have on our financial flexibility, our ability to engage in strategic transactions or our ability to declare and pay cash dividends on our common stock;

·

failure to have the spin‑off qualified as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code;

·

our credit profile;

·

changes in supply and demand of equipment;

·

oilfield anti‑indemnity provisions;

·

severe weather;

·

reliance on information technology resources and the inability to implement new technology;

·

increased labor costs or the unavailability of skilled workers;

·

inability to manage inventory; and

·

inability to successfully consummate acquisitions or inability to manage potential growth.

In light of these risks and uncertainties, you are cautioned not to put undue reliance on any forward‑looking statements in this Form 10‑K. These statements should be considered only after carefully reading this entire Form 10‑K. Except as required under the federal securities laws and rules and regulations of the SEC, we undertake no obligation to publicly update or revise any forward‑looking statements, whether as a result of new information, future events or otherwise. Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward‑looking events discussed in this Form 10‑K not to occur.

Unless otherwise indicated, the industry data included in this Form 10‑K is from the February 2018 issue of the Airline Monitor, December 2017 report from the International Air Transport Association (“IATA”), the Current Boeing Market Outlook 2017, the Aircraft Analytical System (“ACAS”) database, the Airbus or Boeing corporate websites or the U.S. Energy Information Administration’s Annual Outlook 2017 Assumptions report.

3


 

PART I

ITEM 1.  BUSINESS

Except as otherwise indicated or unless the context otherwise requires, “KLX,” “we,” “us” and “our” refer to KLX Inc. and its consolidated subsidiaries after giving effect to the internal reorganization and its spin‑off from B/E Aerospace, and “B/E Aerospace” refers to B/E Aerospace, Inc., its predecessors and its consolidated subsidiaries, other than, for all periods following the spin‑off, KLX Inc. and its consolidated subsidiaries. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—The Spin‑off.”

Our Company

We believe, based on our experience in the industry, that we are one of the world’s leading independent distributors and value‑added service providers of aerospace fasteners and consumables, and that we offer one of the broadest ranges of aerospace hardware and consumables and inventory and supply chain management services worldwide. Our aerospace distribution business is the product of both organic growth and a number of strategic acquisitions beginning in 2001. Through our global facilities network and advanced information technology systems, we believe we offer unparalleled service to commercial airline, business jet and defense original equipment manufacturers and their subcontractors (“OEMs”), airlines, maintenance, repair and overhaul (“MRO”) operators, fixed base operators (“FBOs”) and domestic military depots. With a large and diverse global customer base, including virtually all of the world’s commercial airline, business jet and defense OEMs, OEM subcontractors, airlines and major MRO operators across five continents, as well as the U.S. military, 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 well in excess of $100 million in proprietary information technology (“IT”) systems to create a superior technology platform. Our systems support both internal distribution processes and part attributes, along with customer services, including JIT deliveries and kitting solutions. This business is operated within our Aerospace Solutions Group (“ASG”) segment. During the fiscal year ended January 31, 2018 (“Fiscal 2017”), ASG generated approximately 82% of our consolidated revenues.

Our ASG segment has maintained strong, collaborative, long‑standing relationships with its customers. As a result of our operational and information technology systems, we have historically been able to ship approximately 60% of our orders within 24 hours of receipt of the order. Our seasoned purchasing and sales teams, coupled with state‑of‑the‑art IT and automated parts retrieval systems, help us to sustain our reputation for highly dependable, rapid, on‑time delivery.

ASG sells fasteners and other consumable products to over 7,500 customer locations throughout the world. Its top five customers in Fiscal 2017 collectively accounted for approximately 30% of its Fiscal 2017 revenues.

In the latter part of 2013, we initiated an expansion into the energy services sector. In 2013 and 2014, we acquired seven companies dedicated to providing technical services and related rental equipment to oil and gas exploration and production (“E&P”) 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 on an episodic or urgent 24/7 basis. Our customers include independent and major oil and gas companies that are engaged in the exploration and production of oil and gas properties in onshore North America, including in the Northeast (Marcellus and Utica Shale), Rocky Mountains (Williston and Piceance Basins), Southwest (Permian Basin and Eagle Ford) and Mid‑Continent. This business is operated within our Energy Services Group (“ESG”) segment.

ESG has increased the number of its agreements with customers by over 140% from over 400 as of January 31, 2016 to over 1,000 as of January 31, 2018. These agreements enable us to work for substantially all of the major, regional and independent E&P companies in North America. ESG’s top five customers collectively represented approximately 20% of its Fiscal 2017 revenues.

Our management team has extensive industry experience and company tenure. Our executive officers have an average of more than 20 years of employment in the aerospace or energy services industries.

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Review of Strategic Alternatives

On December 22, 2017, we announced that our Board initiated a review of strategic alternatives to maximize stockholder value, including a possible sale of KLX or a sale of a division or divisions thereof. We have engaged a financial and legal advisor to assist in the process. There can be no assurance of the terms, timing or structure of any transactions, or whether any such transactions will take place at all, and any such transactions are subject to risks and uncertainties. As our Board conducts its review, we remain committed to executing on our business strategies. We do not intend to make any further announcements related to our review unless and until our Board has approved a specific transaction or otherwise determined that further disclosure is appropriate.

Industry Overview

Aerospace Solutions Group

ASG is generally segmented by end customer or sales channel. Based on our experience in this industry, we estimate that during Fiscal 2017 the market for the products and services provided by ASG was approximately $15.1 billion; of this amount, we estimate that approximately 52%, or $7.8 billion, is served by the manufacturers of these products and OEMs directly to the end customers and approximately 48%, or $7.3 billion, is served by distributors such as ASG.

We believe that there is a direct relationship between demand for fasteners and other consumable products and airliner fleet size, aircraft utilization and aircraft age, as well as new aircraft production rates. All aircraft must be serviced at regular intervals, which drives aftermarket demand for aerospace fasteners and consumable products. ASG generated approximately 61% of its Fiscal 2017 revenues supporting original equipment manufacturers of commercial and military aircraft or aircraft system components and derived approximately 39% of its Fiscal 2017 revenues from aftermarket sales to support the in‑service fleet of commercial and military aircraft, and aircraft systems. Historically, aerospace fastener and consumable products revenues have been derived from the following sources:

·

Support for commercial, business jet and military aircraft OEMs;

·

Mandated aircraft maintenance;

·

Support for commercial aircraft, business jet and defense subcontractors;

·

Demand for structural aircraft modifications, cabin interior modifications and passenger‑to‑freighter conversions; and

·

Supply chain management and consumables hardware distribution for land-based military depot aftermarket customers and the U.S. Department of Defense (“DoD”).

In addition, suppliers in the aerospace, defense and related industries often rely on companies such as ASG to provide a customized single point of contact for inventory management, customized invoicing, automated forecasting and usage monitoring, centralized communications and tracking across their broad and varied supply base.

Since 2010, as the global economy began to recover from recession, increased passenger traffic volumes and the return to profitability of the global airline industry have created significant demand for commercial aircraft. Global air traffic demand increased 7.6% in 2017, well above the 10-year average annual growth rate of 5.5% and above the increase of 6.3% in 2016 and 7.4% in 2015. Air traffic growth in 2017 was supported by a broad-based pick-up in global economic conditions, lower cost airfares and strong consumer confidence. IATA forecasts a 2018 airline traffic increase of approximately 6%, above the historical trend for growth.

IATA expects the global airline industry to generate a profit of approximately $34.5 billion in 2017. Overall performance in 2017 has been positively impacted by strong passenger traffic growth, disciplined capacity management,

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positive macroeconomic factors, and improved airline offerings that stimulate demand. These record industry profits were delivered despite a modest reduction in yields as compared with 2016. IATA expects global airline profits of $38.4 billion in 2018, or 11.3% higher than 2017, driven primarily by strong demand, efficiency and lower interest payments. The increase in global airline profits in 2018 is expected to be the eighth straight year of profitability, and the airlines have substantially strengthened their balance sheets over the past several years through operating profits and by accessing capital markets. As a result, we believe airline balance sheets are much stronger than in any time in the past ten years.

Many airlines deferred the replacement of a large number of aging aircraft over the 2000‑2009 period. This, combined with recent more efficient new aircraft introductions, the growing requirements for more aircraft to support projected long‑term traffic growth, record capacity utilization rates, high fuel costs and the low cost of financing new aircraft drove the global airline industry to place record orders for new aircraft. Backlogs at Airbus S.A.S. (“Airbus”) and The Boeing Company (“Boeing”) stood at record levels of 7,253 and 5,864 aircraft, respectively, at January 31, 2018. Airbus reported that they have an approximate nine-year backlog. As a result, most industry analysts believe the outlook for new aircraft production and deliveries will be strong for the foreseeable future.

The strong new aircraft delivery cycle and new contract wins and market share gains have resulted in an increase in ASG’s revenues to support the global aerospace manufacturing base. However, unlike any prior new aircraft delivery cycle, a record number of new aircraft deliveries were to replace and retire older, less fuel efficient aircraft. The increase in our revenues derived from manufacturing customers combined with the decline in aftermarket revenues and higher margins associated with older aircraft, which have been retired, has resulted in a shift in our revenue mix and has impacted our gross margins. Our aftermarket revenues include both commercial aerospace customers and our business serving U.S. military depots. We expect aftermarket revenues to trend upwards in 2018 and beyond, as a larger percentage of the approximately 12,500 new aircraft which have been delivered since 2009 begin to require their first heavy maintenance.

Defense spending has historically been driven by the timing of military aircraft orders and evolving government strategies and policies. We also support military depots for all five branches of our armed services, which maintain in-service aircraft and equipment. Defense spending began to decline in 2012 as the U.S. government implemented its sequestration program and began to sunset production of numerous military aircraft. As a result, we have seen demand from our military and defense manufacturing customers decline from peak levels experienced prior to 2012. However, as a result of recently enacted legislation, industry analysts expect defense spending to increase at a mid-single digit percentage annual rate over the next five years. Similarly, business jet manufacturing has declined since 2007 as a result of lower demand driven by austerity measures implemented by corporate customers, and the reduction in demand from businesses and countries affected by depressed conditions in the global oil and gas industry. However, this period of extended decline is expected to end in 2018 as business jet deliveries are expected to increase 4% in response to mid-single digit growth in business jet traffic and the introduction of new products expected to stimulate demand for new aircraft.

Other factors expected to affect the industries served by ASG include long‑term growth in worldwide fleet of passenger aircraft, an increase in the size of the existing installed base, aging of existing fleet and an expected improvement in the business jet market.

Energy Services Group

The oil and gas industry has historically been both cyclical and seasonal. Activity levels are driven primarily by drilling rig counts, technological advances, well completions and workover activity, the geological characteristics of the producing wells and their effect on the services required to commence and maintain production levels, and our customers’ capital and operating budgets. All of these indicators are driven by commodity prices, which are affected by both domestic and global supply and demand factors. In particular, while U.S. natural gas prices are correlated with global oil price movements, they are also affected by local weather and consumption patterns.

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While global supply and demand factors will continue to result in commodity price volatility, we believe the secular outlook for the on-shore North American oil and gas industry remains positive due to:

·

The projected long-term growth in global energy demand, combined with the United States’ long‑term goal of energy independence.

·

According to the U.S. Energy Information Administration’s Annual Energy Outlook 2017 Assumptions report, currently identified recoverable reserves of 276 billion barrels of shale oil and 2,355 trillion cubic feet of shale gas are contained within the United States.

·

Almost all E&P companies outsource the services required by them to drill wells and maintain production. Drilling and completion activities require numerous services and products from time to time on an “as needed” basis.

·

The decline of conventional North American oil and natural gas reservoirs, together with the development of new recovery technologies, is leading to a shift toward the drilling and development of onshore unconventional oil and natural gas resources that require more wells to be drilled and active maintenance to sustain production and maximize total recoveries. While drilling activity has recently improved and we expect improving operating conditions for oil field service companies, a return to profitability will require that energy supply and demand reach equilibrium and commodity prices stabilize at a level where our customers can achieve an appropriate return on their investments. We believe the increased requirements of these unconventional resources will continue to support increasing service activity as the industry rebalances its allocation of assets to meet future growth.

·

Technologically driven breakthroughs, including (i) continued drilling activity supported by unconventional resources, (ii) the expanding use of horizontal drilling techniques and (iii) longer lateral lengths and increasing number of stages per well, have all created growing demand for services and products to support these advanced drilling activities, many of which are in remote areas with harsh environments.

·

The increasing complexity of technology used in the oil and natural gas exploration and development process requires additional technicians on location during drilling. In particular, the increasing trend of pursuing horizontal and directional wells as opposed to vertical wells requires additional expertise on location and, typically, longer drilling times.

Other factors expected to affect the industry served by our ESG segment include:

Growing Demand for Natural Gas in the United States.  We believe that natural gas will be in increasingly high demand in the United States over time because of its growing popularity as a cleaner burning fuel. The ongoing shift to the use of natural gas from coal-fired power plants and the increased access to residential customers from new pipeline projects is expected to support increased demand for natural gas. In addition, the recent commencement of liquefied natural gas shipments from the United States to foreign markets is also expected to increase demand for natural gas production.

Continued Outsourcing of Ancillary Services.  Some of the services we provide have been historically handled by drilling contractors themselves. In many instances, these services are only ancillary to the primary activity of drilling and completing wells and represent only a minor portion of the total well drilling cost. Drilling contractors often elect to outsource these services to suppliers who have the expertise to be able to provide increasingly more complex, high‑quality and reliable services on a 24/7 basis.

Impact of Recent Industry Downturn.  During the 2014 to mid-2016 industry downturn, prices of oil and natural gas declined rapidly, resulting in a dramatic reduction in drilling and completion activity by oil and gas producers in all regions of North America. Throughout all of 2015 and most of 2016, the oil field services industry experienced a deep retrenchment where both capacity of services across the industry was cut and the pricing of services became deeply

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depressed. During this period, poorly capitalized businesses and many smaller competitors were unable to survive and went out of business. The industry began to see a stabilization in demand in late 2016, and with oil prices rising through the $40’s per barrel and into the $60’s in 2017, oil and gas producers renewed their commitment to their capital budgets, which resulted in a higher level of demand, improved pricing and a more stable operating environment for oil field services businesses.

Products and Services

We conduct our business through two operating segments: ASG and ESG. Information about each of our operating segments is included below.

Aerospace Solutions Group

We believe, based on our experience in the industry, that we are one of the world’s leading independent distributors and value‑added service providers of aerospace fasteners and consumables, and that we offer one of the broadest ranges of aerospace hardware, consumables and inventory and supply chain management services worldwide. ASG, which was formerly the consumables management segment of B/E Aerospace, Inc. (our Former Parent), has evolved into an industry leader through multiple acquisitions, strong organic growth and strategic deployment of capital to address customer demand. As of January 31, 2018, ASG’s global presence consisted of approximately 1.7 million square feet in 25 principal facilities with over 2,000 employees worldwide. We believe ASG’s new global distribution and operations center together with the new warehouse management system will enhance future customer service while supporting productivity gains as well as allow for more effective inventory management as ASG consolidates inventory from three legacy facilities into the new facility.

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 Aerospace Hardware in 2001 and it became the platform upon which the rest of ASG was built. Between 2002 and 2017, we completed nine acquisitions, for an aggregate purchase price of approximately $2.2 billion. In 2016, we acquired Herndon Aerospace and Defense LLC, which principally serves U.S. domestic military depots that support in-service aircraft and other equipment for the five branches of the armed forces. We believe our organic growth together with these acquisitions has enabled us to position ourselves as a preferred global supplier to our customers. We have historically shipped approximately 60% of our orders within 24 hours of receipt of the order. With a large and diverse global customer base, including virtually all of the world’s commercial airline, business jet and defense OEMs, OEM subcontractors, major airlines and major MRO operators across five continents, we provide access to over one million SKUs that include aerospace fasteners and consumables, including chemicals, and related logistics services. Our service offerings include inventory management and replenishment, creative and differential supply chain solutions such as third‑party logistics programs, special packaging and bar‑coding, sophisticated parts kitting, quality assurance testing and a wide variety of purchasing assistance programs, plus the latest in electronic data interchange capability. Our seasoned purchasing and sales teams, coupled with state‑of‑the‑art IT and automated parts retrieval systems, help us to sustain our reputation for high‑quality products and rapid, on‑time delivery.

We service our global customer base of approximately 7,500 customer locations with over 600 sales, marketing, product support and customer service specialists worldwide. Approximately 39% of our Fiscal 2017 ASG segment revenues were derived from the aerospace and airline aftermarket and approximately 61% from sales to OEMs and their suppliers to support manufacturing customers under long-term agreements. We are an authorized distributor for more than 200 manufacturers and distribute products for over 2,500 manufacturers.

We offer an extensive range of products, which we believe serves as a key competitive advantage for our business. Our portfolio consists of:

·

Fasteners.  We stock inventory to support numerous commercial and military aircraft, business jets and helicopters. Our inventory position is highly diversified, supplying bolts, clips, hinges, rings, screws, carbon‑faced seals, gaskets, O‑rings and more.

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·

Chemicals.  We stock approximately 40,000 chemicals and specialty materials SKUs from over 1,000 manufacturers, which we distribute to over 6,000 customers globally. Among these products are chemicals, sealants and adhesives, lubricants, paints, cleaners and degreasers.

·

Honeywell Proprietary Parts.  We hold an exclusive 20‑year license (with 10 years remaining on the original license), which will renew for two successive five‑year periods if certain operating metrics are maintained, on over 30,000 Honeywell proprietary parts. Among the product lines supported by these parts are auxiliary power units, propulsion engines, electrical/electro‑mechanical and airframe and engine accessories. We are also the primary supplier of these parts to Honeywell for their use during the manufacturing of the aforementioned products.

·

Bearings, Electrical, Clamps and Lighting.  We sell lighting products to both OEMs and aftermarket customers. Other product families, such as bearings, tooling, electrical components and clamps, are more recent additions to our product line.

·

Motion and Control.Immediately before the end our fiscal year, we added a product line enabling us to offer our customers technical products, systems and expertise in motion and control applications including hydraulics, pneumatics, fluid connectors, filtration, electrical control systems seals, compressors and engineered systems for both OEM and aftermarket applications.

·

In addition, we substantially expanded our jet engine product support product line.

Our product lines, which are deep and diverse, have an inventory valuation of approximately $1.4 billion.

We believe we offer best‑in‑class customer service, with approximately 60% of all orders shipped within 24 hours of order receipt. Among the core services we offer are:

·

Sales and Technical Support.  We routinely source alternate replacement parts, support part standardization, support our customers by avoiding stock outs, mitigating obsolete parts, actively defining and planning new products, locating suppliers who produce these engineered parts and increasing cost savings and operational and logistics readiness.

·

Delegated Inspection Authority.  This service eliminates receiving inspection and reduces costs through lower record retention expenses, lower inspection expenses and less peer‑to‑peer engineering support and supplier oversight. Additionally, it allows for a better alignment of configuration and increases throughput.

·

Electronic Data Interchange (“EDI”).  Reduces costs as it automatically places orders, processes documents, reduces lead times and stockholding and eliminates data entry errors. We offer two different systems, which are designed for specific customer types and/or their specific needs.

·

Symphony Direct Ship.  Customers can place orders with us and then Symphony™, our proprietary inventory management system, routes these orders automatically to the appropriate supplier of these parts. The supplier will ship the parts directly to the customer by the date requested, eliminating a process queue and thus allowing for a database to be built over time. Products are stocked based on historical usage and forecasts. Through this process, we become the single point of contact for multiple approved suppliers to reduce our customers’ inventory and supplier base. Furthermore, we are able to offer a seamless order and billing process, while allowing full traceability of parts.

·

E‑Commerce.  A new, state-of-the-art e-commerce site was launched in January 2015. This service provides our customers with real‑time connection to our systems and inventory, where they can cross‑reference part numbers and also see product availability. E‑Commerce also provides customers with a customized solution and allows them to view usage reports for part planning and forecasting.

Energy Services Group

We serve energy industry customers who focus on developing and producing oil and gas onshore in North America. We initiated our expansion in the U.S. onshore oil field services sector in August 2013 when we acquired

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seven oilfield service companies operating in all key oil and gas shale basins for an aggregate purchase price of $0.7 billion (including deferred acquisition payments). We have integrated the operations of the seven acquisitions that comprise our current business and manage them both by service and product line offerings and by geographic markets. We offer a variety of services both individually and on a bundled basis as requested by our customers. Our E&P customers require numerous technical services and products on an “as needed” basis, including fishing (retrieval) services and equipment, wireline services, down-hole production services, pressure control, logging, pipe recovery and rental equipment to support these services. Much like the need for just‑in‑time delivery of consumables by ASG, ESG often is faced with just‑in‑time support requirements for our E&P customers that may be experiencing critical operating issues such as servicing an operating well under high pressures, or removing blockages during well drilling or production. As a result, our industry specialists (many with over 40 years of experience) are and may be on‑call (on a rotational basis) up to 24 hours a day, 7 days a week to meet our customers’ needs.

The market for services to support the drilling, completion and production of onshore oil and gas wells has expanded dramatically due to the technological advancements that allow for enhanced recovery from shale formations underlying much of the major onshore oil and gas reservoirs in the United States. This had led to growth in the market for the services we provide. We have established a solid presence in all the major onshore oil and gas producing regions in the contiguous 48 states (other than California), including the Northeast (Marcellus and Utica Shales), Rocky Mountains (Williston, DJ and Piceance Basins), Southwest (Permian Basin and Eagle Ford) and Mid‑Continent regions in North America. We serve energy industry customers who focus on developing and producing oil and gas onshore in North America. We have integrated the operations of the seven acquisitions that comprise our current business and manage them by both service and product line offerings and by geographic markets. We provide high‑quality services and products (new and remanufactured after use and American Petroleum Institute (“API”) certified) to remote drilling sites using our manufacturing, certification, logistics and IT capabilities to properly prepare for deployment, store, locate and deliver our equipment and service teams, as needed, to support our customers’ drilling operations. We also have a growing in-house proprietary tool development team which is focused on designing innovative tools that will further differentiate our services and enhance the outcomes for our customers.

We offer a variety of complementary services, both individually and on a bundled basis, as requested by our customers. Our key service and product offerings include:

·

Fishing Services and Tools:  Our fishing tool business provides a range of specialized services and equipment that is utilized on a non-routine basis for both drilling and well services operations. When intervention is required at the well site, we provide solutions for our customers. When downhole problems develop and drilling or services operations or conditions require non-routine intervention, technicians intervene with specialized tools that are specifically suited to retrieve, or “fish,” and remove trapped equipment. This equipment may include overshots, spears, jarring equipment, internal and external cutters, Venturi tools, magnets and wash over equipment. In addition to our fishing services, we also provide drill‑out services to our clients consisting of downhole motors used to drill out frac plugs and sliding sleeves.

·

Wireline Services:  Our wireline services are provided through mobile units that contain large spools of wire. This large spool of wire will spool and unspool, which in turn allows tools and equipment to be quickly conveyed in and out of a wellbore. These wireline units and personnel provide a variety of different downhole services. These services include composite frac plug pump downs, pipe recovery and perforation, in addition to well evaluation and logging services.

·

Pressure Control:  We offer a full line of pressure control services and rental equipment to assist our clients at the wellsite. When a client moves on a well to perform completion or production activities, they are required to have some means of containing the pressure of the wellbore. Through the use of frac stacks, pressure valves and blow out preventers properly sized for the operation, operators are able to contain any release of pressure from the wellbore. We provide a full line of hydraulic and manual equipment, as well as services to keep them in proper working condition. We service this equipment at our operations facilities to ensure our equipment performs at the wellsite. As part of this service, we also provide rental pipe, power swivels, reverse units and other equipment used to perform well service operations.

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·

Completion Services:  Onshore completion services include a variety of services and equipment related to the initial well stimulation, completion and production. These services include the placement and removal of flow control nipples and valves, completion packers, bridge plugs and composite flow through frac plugs, as well as a full line of downhole services tools to optimize oil and gas recovery. These tools and services coupled with our expertise assist our clients in performing operations to optimize oil and gas recovery. These services and equipment are utilized in both the completion of newly drilled wells and the completion of behind pipe reserves in wells which have been previously drilled but not completed. Downhole completion and production services utilize a wide range of tools consisting of packers, bridge plugs, wellbore clean out equipment and cementation equipment to provide services to the completion and work-over market.

·

Accommodations and Related Surface Rental Equipment:  We provide a variety of mobile, customizable workforce accommodations and offices and associated rental equipment to our customers at their remote field locations to keep crews comfortable and dedicated to the job at hand. Our turnkey solutions can be designed for complex requirements, conditions and personnel. We provide a comprehensive range of value‑added offerings, including workforce housing and office systems, light towers, generators, pressure washers, pumps, forklifts, manlifts, transformers, satellite systems, water and sewer systems and waste management. Along with our product offerings, we provide on‑site customer service.

·

Center for Innovation:  We have a dedicated team of engineers and product experts who work closely with our product line managers to develop new tools and adaptations to existing equipment that improve productivity and outcomes for our customers. As of January 31, 2018, our ESG innovation team has developed 21 proprietary new tools, registered 7 patents and has 27 patents pending. We believe these proprietary tools and patents provide differentiated service outcomes for our customers and have further developed the KLX “brand” as a market leader.

·

Remanufacturing Shop:  Our operations facilities are positioned around the U.S. and allow our personnel to properly service, restore and test all pressure control equipment, valves, choke manifolds and closing units. By properly servicing and re-certifying our equipment, we can ensure our equipment works when it is deployed to a wellsite. In several of the operations facilities, we also offer machine shop services, which consist of CNC lathes, milling machines, spindle lathes and other machining equipment to rework and rectify damaged equipment and to design/build specialized fit‑for‑purpose tools.

We believe that ESG offers services and products which create value for our customers by reducing their exposure to non‑productive time (“NPT”) during the drilling and production phases. We provide services and equipment that assist our customers with maintaining and increasing the permeability of the reservoir. We provide specialized experts and equipment to locate and remove blockages or lost equipment from the reservoir that impede drilling or production operations and a broad range of rental equipment to support the operations of our service personnel and our customers. We provide essentially all of our services and related rental equipment in all of our geo regions, providing consistency for our customers and the ability to manage our business on a best practices basis throughout the organization

Customers, Competition and Marketing

Aerospace Solutions Group

We market our aerospace fasteners and other consumables directly to suppliers to the commercial, business jet, military and defense airframe manufacturers, the airframe manufacturers, the airlines, aircraft leasing companies, MRO providers, domestic military depots, general aviation, and other distributors. We believe that our key competitive advantages are the breadth of our product offerings and our ability to deliver our products on a timely basis, combined with our core competencies in information management, purchasing and logistics management. Customers for our ASG segment include major commercial aircraft, business jet and military OEMs, aftermarket MRO providers and airlines. Approximately 54% of our ASG revenues in Fiscal 2017 were to customers in the Americas with 27% to customers in Europe and the balance to customers in Asia, the Pacific and the Middle East.

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We believe the principal competitive factors in our industry include the ability to provide superior customer service and support, on‑time delivery, sufficient inventory availability, competitive pricing and an effective quality assurance program. Our competitors include both U.S. and foreign companies. Our principal competitors include Adept, Airbus, Alcoa/Arconic, Align, Aviall, Avic, Avio, Avnet, BASN, Boeing (corporate), Boeing Global Services, Champion, Fastenal, Heico, Jamaica Bearings, Pattonair, Precision Castparts, Satair, Wencor, and Wesco Aircraft.

As of January 31, 2018, we employed over 600 sales, marketing, product support and customer service personnel with an average of over 10 years of relevant industry experience.

Energy Services Group

ESG provides services and products and competes in a variety of distinct sub‑segments with a number of competitors. Substantially all of our ESG customers are engaged in the energy industry. Most of our sales are to regional or independent oil companies and these sales have resulted in a diversified and geographically balanced portfolio of more than 700 customers within North America. Revenues from ESG’s five largest customers collectively represented approximately 20% of ESG’s revenues in Fiscal 2017.

Our primary competitors are regional, which provide a more limited range of services and rental equipment and often have more limited financial resources to support their operations. With respect to certain of our services, we also compete with major, multinational companies, including Superior Energy Services, Schlumberger, Halliburton, Baker Hughes and Weatherford. Competition is based on a number of factors, including performance, safety, quality, reliability, service, price, response time and, increasingly, breadth of services and products.

ESG maintains both regional and product/services specialist sales teams. Although sales employees tend to be based locally in regions and field locations, we have established a corporate sales team to coordinate sales and marketing efforts with our key accounts. As of January 31, 2018, we had 22 corporate sales representatives and 53 regional sales representatives with an average of 15 years of experience.

Suppliers and Procurement

Aerospace Solutions Group

We do not believe we are dependent on any single supplier for our raw materials or specified and designed component parts and, based upon the existing arrangements with vendors, our current and anticipated requirements, we believe that we have made adequate provisions for acquiring raw materials.

We have assembled a number of focused procurement teams which effectively source our broad range of products.

·

Planning/Forecasting.  We plan and forecast to individual part number level for global demand, as well as forecast for each customer contract part number, utilizing customized software planning tools.

·

Commodity Procurement.  We have specific commodity strategies with industry experts leading each team and key supplier partnership.

·

Program Procurement.  We have a single supply chain point of contact for each major program coordinating supply, supplier health, forecasting gap buys and cost targets.

·

Advanced Sourcing.  We have quick turnaround for customer demand on non‑stock items. If a customer has emergency requests such as an aircraft hold of service pending receipt of hardware, we will procure for immediate need. We also source new items and qualify alternative parts.

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Energy Services Group

We purchase a wide variety of materials, components and partially completed and finished products from manufacturers and suppliers for our use. We are not dependent on any single source of supply for those parts, supplies, materials or equipment.

Customer Service

Aerospace Solutions Group

We believe that our customers place a very high value on customer service, on‑time delivery and product support and that the level of customer service we provide is a critical differentiating factor in our industry. Our ASG segment brings the resources of an integrated global network, real‑time inventory systems and one‑on‑one personal attention to our customer relationships everywhere in the world. The key elements of such service include:

·

on‑time delivery;

·

immediate availability of spare parts for a broad range of products; and

·

prompt attention to customer needs, including unanticipated problems and on‑site customer training.

Customer service is particularly important to the airlines due to the high costs associated with incorrect or late deliveries.

Energy Services Group

We are highly differentiated in each of the geographic markets that we serve with our services and associated product offerings. This is achieved by providing targeted, complementary services and related products and being responsive to our customers with both quality, as measured by the industry-standard NPT, and timely response to any request. The key elements include:

·

24/7 operations;

·

recognized industry leading technicians in our principal service and product lines;

·

responsiveness to our customers’ requirements for ready‑to‑deploy API certified equipment and a “can do” philosophy;

·

technical interface with customers via product line management personnel; and

·

client intimacy.

Warranty Product Liability, Insurance

Aerospace Solutions Group

We warrant our ASG products, or specific components thereof, for periods ranging from one to three years, depending on product and component type. We receive appropriate product warranties and certifications from the manufacturer, and in the event of a defective part, we look to the manufacturer for reimbursement. Historically, warranty costs have not been material at ASG.

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Energy Services Group

The use of certain of our ESG rental equipment or the provision of technical services in connection therewith could involve operational risk and thereby expose us to liabilities. An accident involving our services or equipment, or the failure of a product, could result in personal injury, loss of life and damage to property, equipment or the environment. Damages from a catastrophic occurrence, such as a fire or explosion, could result in substantial claims for damages. We generally attempt to negotiate the terms of our MSAs consistent with industry practice. In general, we attempt to take responsibility for our own personnel and property, while our customers, such as the E&P companies and well operators, take responsibility for their own personnel, property and all liabilities arising from well and subsurface operations.

We maintain a risk management program that covers operating hazards, including product liability, property damage and personal injury claims as well as certain limited environmental claims. Our risk management program includes primary, umbrella and excess umbrella liability policies of $77 million per occurrence, including sudden and accidental pollution claims. We believe that our insurance is sufficient to cover product liability claims.

Information Technology

Aerospace Solutions Group

We have invested over $100 million in proprietary IT systems within our ASG business. Our IT systems provide a powerful, highly distributed computing environment that enables us to quickly scale on demand as business dictates. Some of the benefits of our IT platform to our customers include services such as:

·

Planning and Forecasting

·

Customized System/Database

·

Supplier and Customer Portals

·

EDI

·

E‑Commerce

·

Support of Value‑Added Services

Our information technology infrastructure is based on a proprietary application that has been highly customized for our aerospace consumables management business over the last 15 years. Our IT systems support our order‑to‑cash, procure‑to‑pay, warehouse management and accounting processes on a global basis. Our key proprietary IT application interfaces with our customized proprietary applications together with leading specialty software packages such as JDA (Demand Planning), Sterling (EDI) and Oracle (Business Intelligence, Financial Consolidations and Financial Reporting). We utilize a Microsoft-based enterprise resource planning (“ERP”) system to support our ASG, ESG and Corporate activities.

We also employ virtualization technology to increase system availability, reduce hardware and maintenance costs and respond efficiently to market dynamics. Our systems are largely hosted on Microsoft “Cloud” platforms as well as a stand-alone data services infrastructure which runs 24/7 and is protected by network security technologies, an uninterrupted power supply and a backup generator. Remote access to our systems is provided via separate, high speed connections.

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Energy Services Group

We have successfully integrated our acquisitions onto a single financial accounting platform using the aforementioned ERP system together with an industry leading rental asset management software “TrakQuip”. These IT systems provide us with a scalable integrated platform that facilitates highly efficient operations, consolidated invoicing and optimal equipment utilization on both a site and segment basis. Our operating strategy is based upon balancing high asset and personnel utilization levels with consistently superior customer service. As such, our IT systems are integral to effectively managing our business.

Government Regulation and Environmental Matters

Aerospace Solutions Group

Governmental agencies throughout the world, including the Federal Aviation Administration (the “FAA”), prescribe standards for aircraft components, including virtually all commercial airline and general aviation products, as well as regulations regarding the repair and overhaul of airframes, equipment and engines. Specific regulations vary from country to country, although compliance with FAA requirements generally satisfies regulatory requirements in other countries. In addition, the products we distribute must also be certified by aircraft and engine OEMs. If any of the material authorizations or approvals that allow us to supply products are revoked or suspended, then the sale of the related products would be prohibited by law, which would have an adverse effect on our business, financial condition and results of operations.

From time to time, the FAA or equivalent regulatory agencies in other countries propose new regulations or changes to existing regulations, which are usually more stringent than existing regulations. If these proposed regulations are adopted and enacted, we could incur significant additional costs to achieve compliance, which could have a material adverse effect on our business, financial condition and results of operations.

We are also subject to other government rules and regulations that include the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”), as amended, the UK Bribery Act of 2010 (“UK Bribery Act”), the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”), sanctions regulations administered by the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC regulations”) the False Claims Act and the European Union’s Registration, Evaluation and Authorization of Chemicals (“REACH”).

Energy Services Group

Our ESG operations are subject to extensive and changing federal, state and local laws and regulations establishing health, safety and environmental quality standards, including those governing discharges of pollutants into the air and water and the management and disposal of hazardous substances and wastes. We may be subject to liabilities or penalties for violations of those regulations. We are also subject to laws and regulations, such as the Federal Superfund Law and similar state statutes, governing remediation of contamination which could occur or might have occurred at facilities that we own or operate, or which we formerly owned or operated, or to which we send or have sent hazardous substances or wastes for treatment, recycling or disposal. We believe that we are currently compliant, in all material respects, with applicable environmental laws and regulations. However, we could become subject to future liabilities or obligations as a result of new or more stringent interpretations of existing laws and regulations. In addition, we may have liabilities or obligations in the future if we discover any environmental contamination or liability relating to our facilities or operations.

Employees

As of January 31, 2018, we had approximately 3,000 employees. As of January 31, 2018, our ASG segment had approximately 2,000 employees. Approximately 59% of ASG’s employees are engaged in distribution, operations, quality and purchasing, 30% in sales, marketing and product support and 11% in finance, human resources, IT and general administration. As of January 31, 2018, our ESG segment had approximately 1,000 employees. This represents a reduction of approximately 600 employees, or approximately 38% of our ESG workforce, from peak levels in 2014 in

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order to align our capacity and associated labor costs with current business conditions. Approximately 82% of ESG’s employees are engaged in operations, quality and purchasing, 7% in sales, marketing and product support and 11% in finance, human resources, IT and general administration. Our employees are not unionized, and we consider our employee relations to be good.

Available Information

Our filings with the SEC, including this Form 10-K, our Quarterly Reports on Form 10-Q, our Proxy Statement, Current Reports on Form 8-K and amendments to any of those reports are available free of charge on our website, http://www.klx.com, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. These reports may also be obtained at the SEC’s public reference room at 100F Street, N.E., Washington, DC 20549. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, information statements, and other information regarding SEC registrants, including KLX Inc. Information included in or connected to our website is not incorporated by reference in this annual report.

ITEM 1A.  RISK FACTORS

You should carefully consider each of the following risks and uncertainties, which we believe are the principal risks that we face and of which we are currently aware, and all of the other information in this Form 10‑K. Some of the risks and uncertainties described below relate to our business, while others relate to the spin‑off. Other risks relate principally to the securities markets and ownership of our common stock.

If any of the following events actually occur, our business, financial condition or financial results could be materially adversely affected, the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties that we do not presently know about or currently believe are not material may also adversely affect our business and operations.

Risks Relating to Our Business

Risks Relating to the Aerospace Solutions Business

We sell products to the airline industry, which is a heavily regulated industry, and the ASG business may be adversely affected if our suppliers or customers lose government approvals, if more stringent government regulations are enacted or if industry oversight is increased.

The FAA prescribes standards and licensing requirements for aircraft components, including virtually all commercial airline and general aviation cabin interior products, and licenses component repair stations within the United States. Comparable agencies, such as the European Aviation Safety Agency, the Civil Aviation Administration of China and the Japanese Civil Aviation Board, regulate these matters in other countries. Our suppliers and customers must generally be certified by such governmental agencies. If any of our suppliers’ government certifications are revoked, we would be less likely to buy such supplier’s products and, as a result, would need to locate a suitable alternate supply of such products, which we may be unable to accomplish on commercially reasonable terms or at all. If any of our customers’ government certifications are revoked, their demand for the products we sell would decline. In each case, ASG’s results of operations and financial condition may be adversely affected.

From time to time, these regulatory agencies propose new regulations or heighten industry oversight. These new regulations generally cause an increase in costs of our suppliers and customers to comply with these regulations. In the case of our suppliers, these expenses may be passed on to us in the form of price increases, which we may be unable to pass along to our customers. In the case of our customers, these expenses may limit their ability to purchase products from us. In addition, the Trump administration has called for substantial change to fiscal and tax policies, which may include border tariffs and new trade deals, which could have significant effects on our customers and, in turn, on our suppliers, which may impact our business. In each case, ASG’s results of operations and financial condition may be adversely affected.

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We are directly dependent upon the conditions in the airline, business jet and defense industries and an economic downturn could negatively impact our results of operations and financial condition.

We are directly dependent upon the airline and business jet industries, which are each sensitive to changes in global economic conditions. The airline industry is highly cyclical and the level of demand for air travel is correlated to the strength of the U.S. and global economies. Stagnant or weakening global economic conditions either in the United States or in other geographic regions, as we are currently experiencing, may have a material adverse effect on our business. Past periods of unfavorable economic conditions caused a reduction in spending for both leisure and business travel, resulting in the airline industry parking aircraft, delaying new aircraft purchases and deliveries, deferring retrofit programs and depleting existing inventories. The business jet industry is also severely impacted by both a weaker economy and by declining corporate profits. According to IATA, the economic downturn in 2008 and 2009, combined with the high fuel prices experienced during most of 2009, contributed to the worldwide airline industry’s loss of approximately $4.6 billion in 2009. In recent times, global financial markets have experienced volatility and disruption, in part due to the collapse in oil prices and the subsequent impact on emerging markets. Concerns over the tightening of the corporate credit markets, inflation, energy costs, the effect of the new U.S. presidential administration and other factors may continue to contribute to volatility in the global financial markets and may create further uncertainties for global economic conditions in the future. Furthermore, the environment in which the airline and business jet industries operate could continue to be affected by adverse foreign exchange impacts, fluctuating fuel prices, consolidation in the industry, changes in regulation, terrorism, safety, environmental, health concerns such as the Zika virus and labor issues. Many of these factors have, and could continue to have, a negative impact on air travel, which could materially adversely affect our business, results of operations, financial condition and cash flows.

Our business is also affected by risks that uniquely impact the airline and business jet industries. For instance, potential terrorist attacks, geopolitical conflict or security breaches, or fear of such events, even if not made directly on or involving the airline industry have, and could continue to have, a negative effect on the airline industry and as a result, our business as well. The global airline industry lost a total of approximately $52.8 billion during the period from 2001 to 2009 as a result of the decline in traffic and airfares caused by, among other things, the September 11, 2001 terrorist attacks, the SARS and H1N1 outbreaks, the conflicts in Iraq and Afghanistan, increases in fuel costs and heightened competition from low-cost carriers. During this period, a significant number of airlines worldwide declared bankruptcy or ceased operations. Any of these factors could potentially impact the airline and business jet industries in the future, and subsequently, materially adversely affect our business, results of operations, financial condition and cash flows.

Military spending, including spending on the products we sell, is dependent upon national defense budgets, and a reduction in military spending could have a material adverse effect on our business, financial condition and results of operations.

The military market is highly dependent upon government budgetary trends, particularly the U.S. Department of Defense (“DoD”) budget. Future DoD budgets could be negatively impacted by several factors, including, but not limited to, a change in defense spending policy by the current and future presidential administrations and Congress, including pursuant to mandated spending reductions under the so‑called “sequestration” process, the U.S. government’s budget deficits, spending priorities, the cost of sustaining the U.S. military presence in overseas operations and possible political pressure to reduce U.S. government military spending, each of which could cause the DoD budget to decline.

A decline in U.S. military expenditures could result in a reduction in military aircraft production or a reduction in spending at U.S. land-based military depots, both of which could have a material adverse effect on our results of operations and financial condition.

We may be materially adversely affected by fluctuating jet fuel prices.

Fluctuations in the global supply of crude oil and the possibility of changes in government policy on jet fuel production, transportation and marketing make it difficult to predict the future availability and price, volatility and cost of jet fuel. In the event of a natural disaster, changes in fuel-related governmental policy, changes in access to petroleum product pipelines and terminals, speculation in energy futures markets, changes in aircraft fuel production capacity, environmental concerns, political disruptions, outbreaks or escalations of hostilities or other conflicts or significant

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disruptions in oil production or delivery in oil‑producing areas or elsewhere, there could be reductions in the production or importation of crude oil and significant increases in the cost of jet fuel. If there were major reductions in the availability of jet fuel or significant increases in its cost, commercial airlines will face increased operating costs. Due to the competitive nature of the airline industry, airlines are often unable to pass on future increases in fuel prices directly to customers by increasing fares. As a result, an increase in the price of jet fuel could result in a decrease in net income from either lower margins or, if airlines increase ticket fares, lower revenue resulting from reduced airline travel. Decreases in airline profitability could decrease the demand for new commercial aircraft, resulting in delays to or reductions in deliveries of commercial aircraft that utilize the products we sell, and, as a result, although rising oil and gas prices may benefit our ESG segment, ASG’s financial condition, results of operations and cash flows could be materially adversely affected.

We and our ASG customers are subject to federal, state, local and foreign laws and regulations regarding issues of health, safety, climate change and the protection of the environment, under which we or our ASG customers may become liable for penalties, damages or costs of remediation or other corrective measures. Changes in such laws or regulations could increase our or our ASG customers’ costs of doing business and adversely impact our business.

Our operations and our ASG customers’ operations are subject to stringent federal, state, local and foreign laws and regulations, including those relating to, among other things, natural resources, wetlands, endangered species, the environment, health and safety, waste management, waste disposal and the transportation of waste and other materials. Some environmental laws and regulations may impose strict liability, joint and several liability or both. Increased costs of regulatory compliance, claims for liability or sanctions for noncompliance and related costs could cause us or our ASG customers to incur substantial costs or losses. Clean‑up costs and other damages resulting from any contamination‑related liabilities and costs associated with changes in and compliance with environmental laws and regulations could result in the reduction or discontinuation of our or our ASG customers’ operations and in a material adverse effect on our financial condition and results of operations.

We have established policies and procedures designed to assist us and our personnel to comply with REACH. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation, business, financial condition and results of operations.

Laws protecting the environment generally have become more stringent over time and we expect them to continue to do so, which could lead to material increases in our and our ASG customers’ costs for future environmental compliance and remediation.

Demand for ASG’s products and services is closely tied to the aerospace industry, which may exhibit pronounced cyclicality.

Demand for the products and services ASG offers is tied to the cyclical nature of the aerospace industry. During periods of economic expansion, when capital spending normally increases, we generally benefit from greater demand for our products. During periods of economic contraction, when capital spending normally decreases, we generally are adversely affected by declining demand for our products and services. Aerospace industry conditions are impacted by numerous factors over which we have no control, including political, regulatory, economic and military conditions, environmental concerns, weather conditions and fuel pricing. Any prolonged cyclical downturn could have an adverse impact on ASG’s operating results.

There are risks inherent in international operations that could have a material adverse effect on ASG’s business operations.

While the majority of ASG’s operations are based domestically, we have significant operations based internationally with distribution facilities in the United Kingdom, Germany and France. In addition, we sell our products to airlines all over the world. Our customers are located primarily in North America, Europe, Asia, the Pacific Rim, South America and the Middle East. As a result, approximately 46% of ASG’s revenues for the year ended January 31,

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2018 were to customers located outside the United States. Volatile international economic, political and market conditions may have a negative impact on our operating results and our ability to achieve our goals.

In addition, we have several subsidiaries in foreign countries (primarily in Europe), which have sales outside the United States. As a result, we are exposed to currency exchange rate fluctuations as a portion of our revenues and expenses are denominated in currencies other than the U.S. dollar. Fluctuations in the value of foreign currencies affect the dollar value of our net investment in foreign subsidiaries, with these fluctuations being included in a separate component of stockholders’ equity. At January 31, 2018, we reported a cumulative foreign currency translation adjustment of approximately $(24.4) million in stockholders’ equity as a result of foreign currency adjustments, and we may incur additional adjustments in future periods. In addition, operating results of foreign subsidiaries are translated into U.S. dollars for purposes of our statement of earnings and comprehensive income at average monthly exchange rates. Moreover, to the extent that our revenues are not denominated in the same currency as our expenses, our net earnings could be materially adversely affected. For example, a portion of labor, material and overhead costs for our distribution facilities in the United Kingdom and Germany are incurred in British pounds or Euros but the related sales revenues may be denominated in U.S. dollars. Changes in the value of the U.S. dollar or other currencies could result in material fluctuations in foreign currency translation amounts or the U.S. dollar value of transactions and, as a result, our net earnings could be materially adversely affected.

Historically, we have not engaged in hedging transactions. However, we may engage in hedging transactions in the future to manage or reduce our foreign exchange risk. Our attempts to manage our foreign currency exchange risk may not be successful and, as a result, our results of operations and financial condition could be materially adversely affected.

Our foreign operations could also be subject to unexpected changes in regulatory requirements, tariffs and other market barriers and political, economic and social instability in the countries where we operate or sell our products and offer our services. The impact of any such events that may occur in the future could subject us to additional costs or loss of sales, which could materially adversely affect our operating results.

We are subject to a variety of risks associated with the sale of our products and services to the U.S. government directly and indirectly through our defense customers, which could negatively affect our revenues and results of operations.

As a supplier directly to the defense industry and as a subcontractor to suppliers of the U.S. government, we face risks that are specific to doing business with the U.S. government. The U.S. government has the ability to unilaterally suspend the award of new contracts to us in the event of any violations of procurement laws, or reviews of the same. It could also reduce the value of our existing contracts as well as audit our costs and fees. Many of our U.S. government contracts, or our customers’ contracts with the United States government, may be terminated for convenience by the government. Termination‑ for‑convenience provisions typically provide that we would recover only our incurred or committed costs, settlement expenses and profit on the work that we completed prior to termination. In such an event, we would not earn the revenue that we would have originally anticipated from such a terminated contract.

Government reviews can be costly and time consuming, and could divert our management resources away from running our business. As a result of such reviews, we could be required to provide a refund to the U.S. government or we could be asked to enter into an arrangement whereby our prices would be based on cost, or the U.S. government could seek to pursue alternative sources of supply for our products. These actions could have a negative effect on our management efficiency and could reduce our revenues and results of operations. Additionally, as a U.S. government contractor or subcontractor, we are subject to federal laws governing suppliers to the U.S. government, including potential application of the False Claims Act.

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We do not have guaranteed future sales of the products we sell and we generally take the risk of cost overruns when we enter into JIT contracts and LTAs with our customers, and our business, financial condition, results of operations and operating margins may be negatively affected if we purchase more products than our customers require, product costs increase unexpectedly, we experience high start‑up costs on new contracts or our contracts are terminated.

Our JIT contracts and LTAs are long‑term, generally fixed‑price agreements with no guarantee of future customer purchase requirements, and may be terminated for convenience on short notice by our customers, often without meaningful penalties, provided that we are reimbursed for the cost of any inventory specifically procured for the customer. In addition, we purchase inventory based on our forecasts of anticipated future customer demand. As a result, we may take the risk of having excess inventory in the event that our customers do not place orders consistent with our forecasts. We also run the risk of not being able to pass along or otherwise recover unexpected increases in our product costs, including as a result of commodity price increases, which may increase above our established prices at the time we entered into the customer contract and established prices for parts we provide. When we are awarded new contracts, particularly JIT contracts, we may incur high costs, including salary and overtime costs to hire and train on‑site personnel, in the start‑up phase of our performance. In the event that we purchase more products than our customers require, product costs increase unexpectedly, we experience high start‑up costs on new contracts or our contracts are terminated, our results of operations and financial condition could be negatively affected.

Our international operations require us to comply with anti‑corruption laws and regulations of the U.S. government and various international jurisdictions, and our failure to comply with these laws and regulations could adversely affect our reputation, business, financial condition and results of operations.

Doing business on a worldwide basis requires us and our subsidiaries to comply with the laws and regulations of the U.S. government and various international jurisdictions, and our failure to successfully comply with these rules and regulations may expose us to liabilities. These laws and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, our international operations are subject to U.S. and foreign anti‑corruption laws and regulations, such as the FCPA and the UK Bribery Act. The FCPA and UK Bribery Act generally prohibit us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record‑keeping and internal accounting practices to accurately reflect the transactions of the company. As part of our business, we deal with state‑owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA. The UK Bribery Act also prohibits commercial bribery. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. As a result of the above activities, we are exposed to the risk of violating anti‑corruption laws.

We are also subject to U.S. and foreign export controls and sanctions laws and regulations, including the ITAR, the EAR and OFAC regulations. The ITAR generally requires export licenses from the U.S. Department of State for goods, technical data and services sent outside the United States that have military or strategic applications. The EAR regulates the export of certain “dual use” goods, software, and technologies, and in some cases requires export licenses from the U.S. Department of Commerce. OFAC regulations implement various sanctions programs that include prohibitions of restrictions on dealings with certain sanctioned countries, governments, entities and individuals. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts as well as other remedial measures. We have established policies and procedures designed to assist us and our personnel to comply with applicable U.S. and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation, business, financial condition and results of operations.

We are dependent on access to and the performance of third‑party package delivery companies.

Our ability to provide efficient distribution of the products we sell to our customers is an integral component of our overall business strategy. We do not maintain our own delivery networks, and instead rely on third‑party package delivery companies. We cannot assure you that we will always be able to ensure access to preferred delivery companies

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or that these companies will continue to meet our needs or provide reasonable pricing terms. In addition, if the package delivery companies on which we rely on experience delays resulting from inclement weather or other disruptions, we may be unable to maintain products in inventory and deliver products to our customers on a timely basis, which may adversely affect our results of operations and financial condition.

Risks Relating to the Energy Services Business

We serve customers who are involved in drilling for and production of oil and natural gas. Demand for services in the oil and natural gas industry is cyclical and experienced a significant downturn during 2015 and 2016, which has significantly affected the performance of our ESG segment. Additional adverse developments affecting this industry could have a material adverse effect on our financial condition and results of operations.

Our revenues in the ESG segment are primarily generated from customers who are engaged in drilling for and production of oil and natural gas. Demand for services in the oil and natural gas industry is cyclical, and we depend on our customers’ willingness to make capital and operating expenditures to explore for, develop and produce oil and natural gas in the United States. Additionally, developments that adversely affect oil and natural gas drilling and production services could reduce our customers’ willingness to make such expenditures and materially reduce our customers’ demand for our services and associated product offerings, resulting in a material adverse effect on our results of operations and financial condition.

The predominant factor that would reduce demand for ESG services and associated product offerings would be a reduction in land‑based drilling activity in the continental United States. The oil and gas industry experienced a significant downturn commencing in late 2014 that continued through 2015 and 2016. At the trough, our customers significantly cut back their capital expenditures resulting in both volume and pricing declines for oil field services, and the number of domestic land drilling rigs decreased by over 75%. Commodity prices, and market expectations of potential changes in these prices, significantly affected activity levels in 2015 and 2016 as well as the rates paid for our services. Worldwide political, economic and military events as well as natural disasters and other factors beyond our control contribute to oil and natural gas price levels and volatility and are likely to continue to do so in the future. Current levels in the price of natural gas, oil or natural gas liquids, as well as ongoing volatility, have had an adverse impact on the level of drilling, exploration and production activity, which could materially and adversely affect the demand for our services and the rates we are able to charge for our services in our ESG segment, although declines in the price of jet fuel may benefit our ASG segment. We negotiate the rates payable under our contracts based on prevailing market rates and rate books which are periodically updated and, as such, the rates we are able to charge will fluctuate with market conditions. However, higher commodity prices may not necessarily translate into increased drilling activity because our customers’ expectations of future prices also influence their activity. Lower demand for oilfield services could resume, which would adversely affect the rates that we are able to charge, and the demand for our services. Additionally, we may incur costs and have downtime any time our customers’ activities are refocused towards different drilling regions.

The domestic E&P industry in the United States underwent a substantial downturn in 2015 and much of 2016 with the beginning of a potential recovery commencing late in the third quarter of 2016 is placing unprecedented pressure on both our customers and competitors. We have reduced costs within our ESG business without compromising the business platform we have built. This includes a significant reduction in capital expenditures in 2016, as well as other workforce rightsizing and ongoing cost initiatives.

Another factor that would reduce the level of drilling and production activity is increased government regulation of that activity. Our customers’ drilling and production operations are subject to extensive federal, state, local and foreign laws and government regulations concerning: emissions of pollutants and greenhouse gases; hydraulic fracturing; the handling of oil and natural gas and byproducts thereof and other materials and substances used in connection with oil and natural gas operations, including drilling fluids and wastewater; well spacing; production limitations; plugging and abandonment of wells; unitization and pooling of properties; and taxation. More stringent legislation or regulation (including public pressure on governmental bodies and regulatory agencies to regulate the oil and natural gas industry), a moratorium on drilling or hydraulic fracturing, or increased taxation of oil and natural gas

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drilling activity could directly curtail such activity or increase the cost of drilling, resulting in reduced levels of drilling activity and therefore reduced demand for our ESG services and associated product offerings.

Spending by E&P companies can also be impacted by conditions in the capital markets. Limitations on the availability of capital, or higher costs of capital, for financing expenditures may cause E&P companies to make additional reductions to capital budgets in the future. Any cuts in capital spending would likely curtail drilling and completion programs as well as discretionary spending on wellsite services, which may result in a reduction in the demand for our services, the rates we can charge and the utilization of our services. Moreover, reduced discovery rates of new oil and natural gas reserves, or a decrease in the development rate of reserves in our market areas, whether due to increased governmental regulation, including with respect to environmental matters, limitations on exploration and drilling activity or other factors, could also have an impact on our business, even in a stronger oil and natural gas price environment. An adverse development in any of these areas could have an adverse impact on our customers’ operations or financial condition, which could in turn result in reduced demand for our services and associated product offerings.

Other factors over which we have no control that could affect our customers’ willingness to undertake drilling and completion spending activities include:

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domestic and foreign supply of and demand for oil and natural gas;

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the availability, pricing and perceived safety of pipeline, trucking, train storage and other transportation capacity;

·

lead times associated with acquiring equipment and availability of qualified personnel;

·

the expected rates of decline in production from existing and prospective wells;

·

the discovery rates of new oil and natural gas reserves;

·

adverse weather conditions, including hurricanes and tornadoes, that can affect oil and natural gas operations over a wide area;

·

oil refining capacity;

·

merger and divestiture activity among oil and gas producers;

·

the availability of water resources and suitable proppants in sufficient quantities and on acceptable terms for use in hydraulic fracturing operations;

·

the availability, capacity and cost of disposal and recycling services for used hydraulic fracturing fluids;

·

the political environment in oil and natural gas producing regions, including uncertainty or instability resulting from civil disorder, terrorism or war;

·

advances in exploration, development and production technologies or in technologies affecting energy consumption; and

·

the price and availability of alternative fuels and energy sources.

Any future changes in the rate at which oil or natural gas reserves are discovered or developed could decrease the demand for our energy services.

Reduced discovery rates of new oil and natural gas reserves, or a decrease in the development rate of reserves, in our market areas, whether due to increased governmental regulation, limitations on exploration and drilling activity or

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other factors, could have a material adverse impact on our financial condition and results of operations even in a stronger oil and natural gas price environment.

Conservation measures and technological advances could reduce demand for oil and natural gas.

Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. We cannot predict the impact of the changing demand for oil and natural gas services, and any major changes may have a material adverse effect on ESG’s results of operations and financial condition.

Delays by us or our ESG customers in obtaining permits or the inability by us or our ESG customers to obtain or renew permits could impair our business.

We and our ESG customers are required to obtain permits from one or more governmental agencies in order to perform certain activities. Such permits are typically required by state agencies but can also be required by federal and local governmental agencies. The requirements for such permits vary depending on the type of operations, including the location where our ESG customers’ drilling and completion activities will be conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued and the conditions which may be imposed in connection with the granting of the permit. Certain regulatory authorities have delayed or suspended the issuance of permits while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. Permitting delays, an inability to obtain or renew permits or revocation of our or our ESG customers’ current permits could cause a loss of revenue and could materially and adversely affect our results of operations and financial condition.

Our ESG business involves many hazards and operational risks, and we are not insured against all the risks we face.

ESG’s operations are subject to many hazards and risks, including the following:

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accidents resulting in serious bodily injury and the loss of life or property;

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liabilities from accidents or damage by our equipment;

·

pollution and other damage to the environment;

·

well blow‑outs, the uncontrolled flow of natural gas, oil or other well fluids into or through the environment, including onto or into the ground or into the atmosphere, groundwater, surface water or an underground formation;

·

fires and explosions;

·

mechanical or technological failures;

·

spillage handling and disposing of materials;

·

adverse weather conditions; and

·

failure of our employees to comply with our internal environmental, health and safety guidelines.

If any of these hazards materialize, they could result in suspension of operations, termination of contracts without compensation, damage to or destruction of our equipment and the property of others, or injury or death to our personnel or third parties and could expose us to substantial liability or losses. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In addition,

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these risks may be greater for us upon the acquisition of another company that has not allocated significant resources and management focus to safety and has a poor safety record.

We are not fully insured against all risks inherent in our business. For example, although we are insured for environmental pollution resulting from certain environmental accidents that occur on a sudden and accidental basis, we may not be insured against all environmental accidents or events that might occur, some of which may result in toxic tort claims. If a significant accident or event occurs for which we are not adequately insured, it could adversely affect our financial condition and results of operations. Furthermore, we may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies may substantially increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage.

Our ESG business has been and may continue to be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry.

The oil and gas industry has historically been both cyclical and seasonal. Activity levels are driven primarily by drilling rig counts, well completions and workover activity, the geological characteristics of the producing wells and their effect on the services required to commence and maintain production levels, and our customers’ capital and operating budgets. All of these indicators are driven by commodity prices, which are affected by both domestic and global supply and demand factors. In particular, while U.S. natural gas prices are correlated with global oil price movements, they are also affected by local market weather and consumption patterns. A prolonged economic slowdown, another recession in the United States, adverse events relating to the energy industry and local, regional and national economic conditions and factors, particularly a slowdown in the E&P industry, would continue to negatively impact our ESG operations and therefore adversely affect our results. The risks associated with our business are more acute during periods of economic slowdown or recession because such periods may be accompanied by decreased spending by our customers.

Through our ESG segment, we participate in a capital‑intensive industry, and may need to obtain additional capital or financing to fund expansion of our asset base, which could increase our financial leverage, or we may not be able to finance our capital needs.

In order to expand our ESG asset base, we may need to make significant capital expenditures. If we do not make sufficient or effective capital expenditures, we will be unable to organically expand our business operations. These expenditures may be significant because assets in our industry require significant capital to purchase and modify.

We intend to fund our future capital expenditures primarily with cash flows from operating activities and existing cash balances and, to the extent that is not sufficient, from borrowings under our $750 million secured revolving credit facility. If our cash, cash flows from operating activities and borrowings under the secured revolving credit facility are not sufficient to fund our capital expenditures, we would be required to fund these expenditures through the issuance of additional debt or equity or pursue alternative financing plans, such as refinancing or restructuring our debt, selling assets or reducing or delaying acquisitions or capital investments, such as planned upgrades or acquisitions of equipment and refurbishments of equipment, even if previously publicly announced.

The terms of any future debt instruments may restrict us from adopting some of these alternatives. If debt and equity capital or alternative financing plans are not available on favorable terms or at all, we would be required to curtail our capital spending, and our ability to sustain or improve our profits may be adversely affected. Our ability to refinance or restructure our debt will depend on the condition of the capital markets and our financial condition at such time, among other things. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing common stock may result in significant dilution to our current stockholders.

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Shortages or increases in the costs of the equipment we use in our operations, or the availability of experienced personnel to perform our services could adversely affect our operations in the future.

We generally do not have specialized tools, trucks or long‑term contracts in place that provide for the delivery of equipment, including, but not limited to, replacement parts and other equipment. We could experience delays in the delivery of the equipment that we have ordered and its placement into service due to factors that are beyond our control. New federal regulations regarding diesel engines, demand by other oilfield services companies and numerous other factors beyond our control could adversely affect our ability to procure equipment that we have not yet ordered or cause the prices of such equipment to increase. Price increases, delays in delivery and interruptions in supply may require us to increase capital and repair expenditures and incur higher operating costs. Each of these could have a material adverse effect on our financial condition and results of operations.

We are dependent on a small number of suppliers for key goods and services that we use in our operations.

We do not have long term contracts with third party suppliers of many of the goods and services that we use in large volumes in our ESG operations, including manufacturers of accommodations units, rental and fishing tools, chargers and other tools and equipment used in our operations. Especially during periods in which oilfield services are in high demand, the availability of certain goods and services used in our industry decreases and the price of such goods and services increases. We are dependent on a small number of suppliers for key goods and services. During the twelve months ended January 31, 2018, based on total purchase cost, our ten largest suppliers of goods and services represented approximately 24% of all such purchases. Our reliance on such suppliers could increase the difficulty of obtaining such goods and services in the event of a shortage in our industry or cause us to pay higher prices. Price increases, delays in delivery and interruptions in supply may require us to incur higher operating costs. Each of these could have a material adverse effect on our results of operations and financial condition.

Our inability to develop, obtain or implement new technology may cause us to become less competitive.

The energy services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent protection or costly to obtain. As competitors and others use or develop new technologies in the future, we may be placed at a competitive disadvantage if we fail to keep pace with technological advancements within our industry. Furthermore, we may face competitive pressure to implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and implement new technologies before we can. We cannot be certain that we will be able to implement new technologies or products on a timely basis or at an acceptable cost. Thus, limits on our ability to effectively use and implement new and emerging technologies may have a material adverse effect on our results of operations and financial condition.

Oilfield anti‑indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us.

We typically enter into agreements with our ESG customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. These agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti‑indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti‑indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our results of operations and financial condition.

Changes in trucking regulations may increase our transportation costs and negatively impact our results of operations.

For the transportation and relocation of our oilfield services equipment, we operate trucks and other heavy equipment. Therefore, we are subject to regulation as a motor carrier by the U.S. Department of Transportation and by

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various state agencies, whose regulations include certain permit requirements of highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, the hours of service regulations that govern the amount of time a driver may drive or work in any specific period, limits on vehicle weight and size and other matters. EPA regulations limiting exhaust emissions became more restrictive in 2010. In 2010, an executive memorandum was signed directing the National Highway Traffic Safety Administration (the “NHTSA”) and the U.S. Environmental Protection Agency (the “EPA”) to develop new, stricter fuel efficiency standards for heavy trucks. In 2011, the NHTSA and the EPA adopted final rules that established fuel economy and greenhouse gas standards for medium- and heavy-duty vehicles. These standards apply to model years 2014 to 2018, which are required to achieve an approximate 20 percent reduction in fuel consumption by model year 2018. In October 2016, the NHTSA and the EPA published new, stricter standards that would apply to trailers beginning with model year 2018 and tractors beginning with model year 2021. As a result of these regulations, we may experience an increase in costs related to truck purchases or rentals and maintenance, an impairment of equipment productivity, a decrease in the residual value of these vehicles and an increase in operating expenses. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase our operating costs. We cannot predict whether, or in what form, any legislative or regulatory changes applicable to our trucking operations will be enacted and to what extent any such legislation or regulations could increase our costs or otherwise adversely affect our results of operations and financial condition.

Changes in laws or government regulations regarding hydraulic fracturing could increase our customers’ costs of doing business, limit the areas in which our customers can operate and reduce oil and natural gas production by our customers, which could adversely impact our business.

The adoption of any future federal, state or local laws or implementing regulations imposing reporting obligations on, or limiting or banning, the hydraulic fracturing process could make it more difficult to complete natural gas and oil wells and could have a material adverse impact on ESG’s results of operations and financial condition. Presently, hydraulic fracturing is regulated primarily at the state level, typically by state oil and natural gas commissions and similar agencies, although the EPA has asserted federal regulatory authority pursuant to the Safe Drinking Water Act (“SDWA”). Several states have either adopted or proposed laws and/or regulations to require oil and natural gas operators to disclose chemical ingredients and water volumes used to hydraulically fracture wells, in addition to more stringent well construction and monitoring requirements. In December 2016, the EPA released its final report on the impacts of hydraulic fracturing on drinking water resources. The EPA report concluded that hydraulic fracturing activities have not led to widespread, systemic impacts on drinking water resources in the United States, although there are above-and below-ground mechanisms by which hydraulic fracturing activities have the potential to impact drinking water resources. Other governmental agencies, including the U.S. Department of Energy and the U.S. Department of the Interior, are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory mechanisms. If new federal, state or local laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements could result in delays, eliminate certain drilling activities and make it more difficult or costly for our customers to perform fracturing. Any such regulations limiting or prohibiting hydraulic fracturing could reduce oil and natural gas exploration and production activities by our customers and, therefore, adversely affect our business. Such laws or regulations could also materially increase our costs of compliance and doing business by more strictly regulating how hydraulic fracturing wastes are handled or disposed.

We and our ESG customers are subject to federal, state and local laws and regulations regarding issues of health, safety, climate change and the protection of the environment, under which we or our customers may become liable for penalties, damages or costs of remediation or other corrective measures. Changes in such laws or regulations could increase our or our customers’ costs of doing business and adversely impact our business.

Our operations and our ESG customers’ operations are subject to stringent federal, state and local laws and regulations, including those relating to, among other things, protection of natural resources, wetlands, endangered species, the environment, health and safety, waste management, waste disposal and the transportation of waste and other

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materials. Many of the facilities that are used for our ESG operations are leased, and such leases include varying levels of indemnity obligations to the landlord for environmental matters related to our use and occupation of such facilities. Our ongoing operations and our ESG customers’ operations pose risks of environmental liability, including leakage from operations to surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations may impose strict liability, joint and several liability, or both. Additionally, an increase in regulatory requirements on oil and gas exploration and completion activities could significantly delay or interrupt our ESG customers’ operations. Increased costs of regulatory compliance, claims for liability or sanctions for noncompliance and related costs could cause us or our ESG customers to incur substantial costs or losses. Clean‑up costs and other damages resulting from any contamination‑related liabilities and costs associated with changes in and compliance with environmental laws and regulations could result in the reduction or discontinuation of our or our ESG customers’ operations, and in a material adverse effect on our financial condition and results of operations.

The U.S. Congress has considered adopting legislation to reduce emissions of greenhouse gases (“GHGs”) and almost one‑half of the states have already taken legal measures to reduce emissions of GHGs. The EPA has begun adopting and implementing regulations to restrict emissions of GHGs under existing provisions of the Clean Air Act. Although it is not possible at this time to estimate how potential future laws or regulations addressing GHG emissions could impact our business, any future federal, state or local laws or regulations that may be adopted to address GHG emissions in areas where our customers operate could require our customers to incur increased compliance and operating costs. Regulation of GHGs could also result in a reduction in demand for and production of oil and natural gas, which would result in a decrease in demand for our services. Moreover, incentives to conserve energy or use alternative energy sources could reduce demand for oil and natural gas.

Laws protecting the environment generally have become more stringent over time and could continue to do so, which could lead to material increases in our and our ESG customers’ costs for future environmental compliance and remediation.

We may be required to assume responsibility for environmental and other liabilities of companies we have acquired or will acquire.

We may incur liabilities in connection with environmental conditions currently unknown to us relating to our existing, prior or future operations or those of predecessor companies whose liabilities we may have assumed or acquired. We also could be subject to third‑party and governmental claims with respect to environmental matters, including claims under the Comprehensive Environmental Response, Compensation and Liability Act in instances where we are identified as a potentially responsible party. We believe that indemnities provided to us in certain of our pre‑existing acquisition agreements may cover certain environmental conditions existing at the time of the acquisition, subject to certain terms, limitations and conditions. However, if these indemnification provisions terminate or if the indemnifying parties do not fulfill their indemnification obligations, we may be subject to liability with respect to the environmental matters that those indemnification provisions address.

Increased labor costs or the unavailability of skilled workers could hurt our operations.

We are dependent upon a pool of available skilled employees to operate and maintain our business. We compete with other oilfield services businesses and other similar employers to attract and retain qualified personnel with the technical skills and experience required to provide the highest quality service. The demand for skilled workers is high and the supply is limited, and a shortage in the labor pool of skilled workers or other general inflationary pressures or changes in applicable laws and regulations could make it more difficult for us to attract and retain personnel and could require us to enhance our wage and benefits packages thereby increasing our operating costs.

Although our employees are not covered by a collective bargaining agreement, union organizational efforts could occur and, if successful, could increase our labor costs. A significant increase in the wages paid by competing employers or the unionization of groups of our employees could result in increases in the wage rates that we must pay. Likewise, laws and regulations to which we are subject, such as the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions, can increase our labor costs or subject us to liabilities to our employees. We cannot assure you that labor costs will not increase. Increases in our labor costs or unavailability

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of skilled workers could impair our capacity and diminish our profitability, having a material adverse effect on our business, financial condition and results of operations.

General

There can be no assurance that our review of strategic alternatives will enhance stockholder value or result in any transaction being consummated, and speculation and uncertainty regarding the outcome of our review of strategic alternatives may adversely impact our business.

On December 22, 2017, we announced that we had engaged a financial and legal advisor and are pursuing strategic alternatives to enhance stockholder value, including a possible sale of KLX or a sale of a division or divisions thereof. There can be no assurance of the terms, timing or structure of any transactions, or whether any such transactions will take place at all, and any such transactions are subject to risks and uncertainties. The process of reviewing strategic alternatives may involve significant resources and costs. In addition, the announced review of strategic alternatives may cause or result in:

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disruption of our business;

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difficulty in maintaining or negotiating and consummating new business or strategic relationships or transactions;

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distraction to our management and employees;

·

increased stock price volatility; and

·

increased costs and advisory fees.

If we are unable to mitigate these or other potential risks related to the uncertainty caused by our review of strategic alternatives, it may disrupt our businesses or could have a material adverse effect on our business, financial condition or results of operations.

Our ability to complete any transaction, if our Board decides to pursue one or more, will depend on numerous factors, some of which are outside of our control, including market conditions, interest of third parties in our business, industry trends and the availability of financing to potential buyers on commercially acceptable terms. Even if a transaction is completed, there can be no assurance that it will be successful or have a positive effect on stockholder value. Our Board may also determine that no transaction is in the best interest of stockholders at the time due to various factors. Further, it is not certain what impact any potential transactions, or a decision not to pursue any potential transactions, may have on our stock price, business, financial condition or results of operations.

We operate in highly competitive markets and our failure to compete effectively may negatively impact our results of operations.

The markets in which we operate are highly competitive. Since we sell our ASG segment products around the world, we face competition in the aerospace solutions market from both U.S. and non‑U.S. companies. We believe that the principal competitive factors in this industry include the ability to provide superior customer service and support, on‑time delivery, sufficient inventory availability, competitive pricing and an effective quality assurance program.

In terms of the energy services market, price competition, equipment availability, location and suitability, experience of the workforce, safety records, reputation, operating integrity and condition of the equipment are all factors used by customers in awarding contracts. Our competitors are numerous, and many have more financial and technological resources. Contracts are traditionally awarded on the basis of competitive bids or direct negotiations with customers. The competitive environment has intensified as recent mergers among E&P companies have reduced the number of available ESG customers. The fact that certain oilfield services equipment is mobile and can be moved from

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one market to another in response to market conditions heightens the competition in the industry. In addition, any increase in the supply of hydraulic fracturing fleets could have a material adverse impact on market prices. This increased supply could also require higher capital investment to keep our services competitive.

Some of our competitors may have greater financial, technical, marketing and personnel resources than we do. Our future success and profitability will partly depend upon our ability to keep pace with our customers’ demands for awarding contracts.

If we lose significant customers, significant customers materially reduce their purchase orders or significant programs on which we rely are delayed, scaled back or eliminated, our business, financial condition and results of operations may be adversely affected.

Our significant customers change from year to year, in the case of ASG, depending on the level of overhaul, maintenance, repair and refurbishment activity and the level of new aircraft purchases, and in the case of ESG, depending on the level of E&P activity and the use of our services. During Fiscal 2017, 2016 and 2015, no single customer accounted for more than 10% of our consolidated revenues. ASG’s top five customers for Fiscal 2017 together accounted for approximately 30% of its revenues. ESG’s top five customers for Fiscal 2017 together accounted for approximately 20% of its revenues.

A reduction in purchasing our products or services by or loss of one of our larger customers for any reason, such as changes in manufacturing or drilling practices, loss of a customer as a result of the acquisition of such customer by a purchaser who, in the case of ASG, does not fully utilize a distribution model, or who uses a competitor, in‑sourcing by customers, a transfer of business to a competitor, an economic downturn, insolvency of a customer, failure to adequately service our clients, decreased production or a strike, could have a material adverse effect on our financial condition and results of operations.

We may be unable to effectively and efficiently manage our inventories and/or our equipment fleet as we expand our business, which could have an adverse effect on our financial condition.

We have substantially expanded the size, scope and nature of our business through acquisitions and organic means, resulting in an increase in the breadth of our product offerings and an expansion of our business geographically. Business expansion places increasing demands on us to increase the inventories that we carry and/or our equipment fleet. We must anticipate demand well out into the future in order to service our extensive customer base. The inability to effectively and efficiently manage our inventories to meet current and future needs of our customers, which may vary widely from what is originally forecast due to a number of factors beyond our control, could have an adverse effect on our results of operations and financial condition.

If suppliers are unable to supply us with the products we sell in a timely manner, in adequate quantities and/or at a reasonable cost, we may be unable to meet the demands of our customers, which could have a material adverse effect on our business, financial condition and results of operations.

We depend on manufacturing firms to support our operations through the timely supply of products. Our suppliers may experience capacity constraints that may result in their inability to supply us with products in a timely fashion, with adequate quantities or at a desired price. Factors affecting the manufacturing sector can include labor disputes, general economic issues, and changes in raw material and energy costs. Natural disasters such as earthquakes or hurricanes, as well as political instability and terrorist activities, may negatively impact the production or delivery capabilities of our suppliers as well. These factors could lead to increased prices for our inventory, curtailment of supplies and the unfavorable allocation of product by our suppliers, which could reduce our revenues and profit margins and harm our customer relations. Significant disruptions in our supply chain could negatively impact our results of operations and financial condition.

29


 

Increased leverage could adversely impact our business and results of operations.

We may incur additional debt under our $750 million secured revolving credit facility or otherwise to finance our operations or for future growth, including funding acquisitions. A high degree of leverage could have important consequences to us. For example, it could:

·

increase our vulnerability to adverse economic and industry conditions;

·

require us to dedicate a substantial portion of cash from operations to the payment of debt service, thereby reducing the availability of cash to fund working capital, capital expenditures and other general corporate purposes;

·

limit our ability to obtain additional financing for working capital, capital expenditures, general corporate purposes or acquisitions;

·

place us at a disadvantage compared to our competitors that are less leveraged; and

·

limit our flexibility in planning for, or reacting to, changes in our business and in our industry.

We cannot ensure that any future acquisitions will be successful in delivering expected performance post‑acquisition, which could have a material adverse effect on our financial condition.

Our business was created largely through a series of acquisitions. We regularly evaluate acquisition opportunities, frequently engage in acquisition discussions and conduct due diligence activities and, where appropriate, engage in acquisition negotiations, some of which could be material to us. Our ability to continue to achieve our goals may depend upon our ability to effectively identify attractive businesses, access financing sources on acceptable terms, negotiate favorable transaction terms and successfully consummate and integrate any businesses we acquire, achieve cost efficiencies and to manage these businesses as part of our company.

Our acquisition activities may involve unanticipated delays, costs and other problems. If we encounter unanticipated problems with one of our acquisitions, our senior management may be required to divert attention away from other aspects of our business. Additionally, we may fail to consummate proposed acquisitions or divestitures, after incurring expenses and devoting substantial resources, including management time, to such transactions. Acquisitions also pose the risk that we may be exposed to successor liability relating to actions by an acquired company and its management before the acquisition. The due diligence we conduct in connection with an acquisition, and any contractual guarantees or indemnities that we receive from the sellers of acquired companies, may not be sufficient to protect us from, or compensate us for, actual liabilities. Additionally, depending upon the acquisition opportunities available, we also may need to raise additional funds through the capital markets or arrange for additional bank financing in order to consummate such acquisitions or to fund capital expenditures necessary to integrate the acquired business. We also may not be able to raise the substantial capital required for acquisitions and integrations on satisfactory terms, if at all.

We may experience future impairment charges.

To conduct our global business operations and execute our strategy, we acquire tangible and intangible assets, which affect the amount of future period amortization expense and possible impairment expense that we may incur. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated and combined financial statements. As part of our strategy, we may make one or more acquisitions, which may result in the addition of duplicative assets, particularly inventories of certain parts. In the event such an acquisition results in the combined assets of our company and the acquired assets being in excess of any reasonable forecast of future need, the excess portion of the book value of these assets may be judged to be impaired. In accordance with ASC 360, Property, Plant, and Equipment, we assess potential impairment to long-lived assets (property and equipment and amortized intangible assets) when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Our judgment regarding the existence of impairment indicators and future cash flows related to intangible assets is based on operational performance of our acquired businesses,

30


 

expected changes in the global economy, aerospace industry projections, discount rates and other judgmental factors. We would be required to record any such impairment losses resulting from any such test as a charge to operating results. To perform the annual assessment, we utilize a combination of income and market-based approaches to value the reporting units. The income approach to valuation relies on a discounted cash flow analysis to determine the fair value of each reporting unit, which considers forecasted cash flows discounted at an appropriate discount rate. The annual goodwill impairment test requires us to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins and working capital requirements, which are based upon our long-term strategic plan. The discount rate is an estimate of the overall after-tax rate of return required by a market participant, whose weighted average cost of capital includes both equity and debt, including a risk premium. Any future impairment loss could have a material adverse impact on our results of operations. As of January 31, 2018, our management believes the estimated fair value of each of our reporting units with goodwill balances, our indefinite lived intangible assets and each of our long-lived assets were each in excess of their carrying values. There were no indicators of goodwill or intangible asset impairment at January 31, 2018.

Our total assets include substantial intangible assets. The write‑off of a significant portion of intangible assets would negatively affect our reported financial results.

Our total assets reflect substantial intangible assets. At January 31, 2018, goodwill and identified intangibles, net, represented approximately 36% of our total assets. Intangible assets consist principally of goodwill and other identified intangible assets associated with our acquisitions. On at least an annual basis, we assess whether there has been an impairment in the value of goodwill and other intangible assets with indefinite lives. If the carrying value of the tested asset exceeds its estimated fair value, impairment is deemed to have occurred. In this event, the amount is written down to fair value. Under generally accepted accounting principles in the United States, this would result in a charge to operating earnings. Any determination requiring the write‑off of a significant portion of goodwill or unamortized identified intangible assets would negatively affect our results of operations and total capitalization, which could be material. For example, during the year ended January 31, 2016, we recorded a non-cash goodwill and identified intangibles impairment charge of $488.2. There were no impairment charges recorded in Fiscal 2017, 2016 or 2014. As of January 31, 2018, the balances of goodwill and intangible assets were $1,056.8 and $308.6, respectively.

Our debt instruments have significant financial and operating restrictions that may have an adverse effect on our operations.

Our ability to make payments on and refinance our indebtedness, including our current debt as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that we cannot control. The debt instruments governing such arrangements contain numerous financial, operating and/or negative covenants that limit our ability to incur additional or repay existing indebtedness, to create liens or other encumbrances, to make certain payments and investments, including dividend payments, to engage in transactions with affiliates, to engage in sale/leaseback transactions, to guarantee indebtedness and to sell or otherwise dispose of assets and merge or consolidate with other entities. Agreements governing future indebtedness could also contain significant financial and operating restrictions. If we cannot service our debt or repay or refinance our debt as it becomes due, we may be forced to sell assets or take other disadvantageous actions, including (1) reducing financing in the future for working capital, capital expenditures and general corporate purposes or (2) dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in the aerospace consumables and oilfield services industries could be impaired. The lenders or other investors who hold debt that we fail to service or on which we otherwise default could also accelerate amounts due, which could potentially trigger a default or acceleration of our other debt. We may not have, or may not be able to obtain, sufficient funds to make any required accelerated payments.

Our operations rely on an extensive network of information technology resources and a failure to maintain, upgrade and protect such systems could adversely impact our business, financial condition and results of operations.

Information technology plays a crucial role in all of our operations. To remain competitive, our hardware, software and related services must interact with our suppliers and customers efficiently, record and process our financial

31


 

transactions accurately, and obtain the data and information to enable the analysis of trends and plans and the execution of our strategies.

The failure or unavailability of our information technology systems could directly impact our ability to interact with our customers and provide them with products and services when needed. Such failure to properly supply or service our customers could have an adverse effect on our business, financial condition and results of operations. Moreover, our customer relationships could be damaged well beyond the period of the downtime of our information technology systems.

We may be unable to retain personnel who are key to our operations.

Our success, among other things, is dependent on our ability to attract, develop and retain highly qualified senior management and other key personnel. Competition for key personnel is intense, and our ability to attract and retain key personnel is dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent. The inability to hire, develop and retain these key employees may adversely affect our operations.

We have been expanding our available products and services, and our business may continue to grow at a rapid pace. Our inability to properly manage or support the growth may have a material adverse effect on our business, financial condition, and results of operations and could cause the market value of our common stock to decline.

We have been expanding our available products and services in recent periods and intend to continue to grow our business both through acquisitions and internal expansion of products and services. Our growth could place significant demands on our management team and our operational, administrative and financial resources. We may not be able to grow effectively or manage our growth successfully, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.

Severe weather conditions, including hurricanes, tornadoes and tropical storms, could have a material adverse effect on our business.

Adverse weather can directly impede our operations. Repercussions of severe weather conditions may include: curtailment of services; weather‑related damage to facilities and equipment, resulting in suspension of operations; in the case of our ESG segment, inability to deliver equipment and personnel to job sites in accordance with customer requirements; in the case of our ASG segment, inability to deliver products to customers in accordance with contract schedules or critical next‑day customer requirements and loss of productivity. These constraints could delay our operations and materially increase our operating and capital costs. The operations of our ESG customers could also be adversely affected by severe weather, such as unusually warm winters or cool summers decreasing demand for natural gas or droughts in semi‑arid regions impacting hydraulic fracturing operations, which could affect the demand for services of our ESG segment.

Additionally, our operations are particularly susceptible to the impact of hurricanes, tornadoes and tropical storms, as our corporate headquarters and certain of our principal facilities are located in Florida and Texas. A hurricane or tropical storm could result in major damage to our properties, inventory and equipment and the properties of our customers located in such areas. Additionally, a hurricane or tropical storm could delay or disrupt the delivery of supplies to our facilities, which could lead to delays in delivering our products to our customers. Related storm damage could also affect telecommunications capability, causing interruptions to our operations. These and other possible effects of hurricanes or tropical storms could have a material adverse effect on our business.

32


 

Risks Relating to the Spin‑Off

If the distribution, together with certain related transactions, were to fail to qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, then we and/or B/E Aerospace and our stockholders could be subject to significant tax liabilities.

B/E Aerospace did not request a private letter ruling from the IRS in respect of the distribution because in 2013 the IRS announced in public guidance that it generally will no longer issue private letter rulings to the effect that, for U.S. federal income tax purposes, a spin‑off transaction (similar to the distribution together with certain related transactions) will qualify as a reorganization under Sections 355 and 368(a)(1)(D) of the Code. The distribution was, however, conditioned upon, among other matters, B/E Aerospace’s receipt of an opinion of Shearman & Sterling LLP, which remained in full force and effect at the time of distribution, to the effect that the distribution, together with certain related transactions, qualified as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. Shearman & Sterling LLP’s opinion, which B/E Aerospace has received, relies on certain representations, assumptions, undertakings and covenants, and the conclusions set forth in the opinion may be adversely affected if one or more of the representations and assumptions is incorrect or one or more of the undertakings and covenants is not complied with. These representations, assumptions, undertakings and covenants relate to, among other things, B/E Aerospace’s business reasons for proceeding with the distribution, the past and future conduct of our businesses and those of B/E Aerospace, the historical ownership and capital structures of B/E Aerospace and our and B/E Aerospace’s current plans and intentions to not materially modify our or B/E Aerospace’s respective ownership and capital structures following the distribution. Notwithstanding the opinion, the IRS could determine that the distribution should be treated as a taxable transaction if it determines that any of the representations, assumptions, undertakings or covenants upon which the opinion relied is incorrect or has not been completed or complied with or if it disagrees with the conclusions in the tax opinion. For more information regarding the tax opinion, see the section entitled “The Spin‑Off—Material U.S. Federal Income Tax Consequences of the Distribution” included elsewhere in this annual report.

Following the distribution, on October 23, 2016, B/E Aerospace agreed to be acquired by Rockwell Collins, Inc., and the acquisition subsequently closed on April 13, 2017 (the “B/E Acquisition”). In certain circumstances, the acquisition of a company that had distributed one or more subsidiaries in a spin-off, such as B/E Aerospace, can result in a prior spin-off transaction retroactively failing to qualify for tax free treatment. Shearman & Sterling LLP has rendered opinions, on which we are entitled to rely, that the B/E Acquisition will not cause the distribution to fail to qualify for tax free treatment. The opinions of Shearman & Sterling LLP are not binding on the IRS, and no ruling will be sought regarding the effect, if any, of the B/E Acquisition on the distribution.

If the distribution fails to qualify for tax‑free treatment, B/E Aerospace would be subject to tax on gain, if any, as if it had sold our common stock in a taxable sale for its fair market value at the time of the distribution. In addition, if the distribution fails to qualify for tax‑free treatment, each of our initial public stockholders would be treated as if the stockholder had received a distribution from B/E Aerospace in an amount equal to the fair market value of our common stock that was distributed to the stockholder, which generally would be taxed as a dividend to the extent of the stockholder’s pro rata share of B/E Aerospace’s current and accumulated earnings and profits and then treated as a non‑taxable return of capital to the extent of the stockholder’s basis in the B/E Aerospace common stock and finally as capital gain from the sale or exchange of B/E Aerospace common stock. Furthermore, even if the distribution were otherwise to qualify under Sections 355 and 368(a)(1)(D) of the Code, it may be taxable to B/E Aerospace (but not to B/E Aerospace’s stockholders) under Section 355(e) of the Code, if the distribution were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50% or greater interest in B/E Aerospace or us. For this purpose, any acquisitions of B/E Aerospace stock or of our common stock within the period beginning two years before the distribution and ending two years after the distribution are presumed to be part of such a plan, although we or B/E Aerospace may be able to rebut that presumption, including through the use of certain safe harbors contained in U.S. Treasury Regulations under Section 355(e) of the Code.

Under the Tax Sharing and Indemnification Agreement between B/E Aerospace and us, we would generally be required to indemnify B/E Aerospace against any tax resulting from the distribution to the extent that such tax resulted from any of the following events (among others): (1) an acquisition of all or a portion of our stock or assets, whether by merger or otherwise, (2) any negotiations, understandings, agreements or arrangements with respect to transactions or

33


 

events that cause the distribution to be treated as part of a plan pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50% or greater interest in us, (3) certain other actions or failures to act by us, or (4) any breach by us of certain of our representations or covenants. Our indemnification obligations to B/E Aerospace and its subsidiaries, officers and directors are not limited by any maximum amount. If we are required to indemnify B/E Aerospace or such other persons under the circumstances set forth in the Tax Sharing and Indemnification Agreement, we could be subject to substantial liabilities.

The spin‑off may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements.

The spin‑off is subject to review under various state and federal fraudulent conveyance laws. Fraudulent conveyance laws generally provide that an entity engages in a constructive fraudulent conveyance when (1) the entity transfers assets and does not receive fair consideration or reasonably equivalent value in return and (2) the entity (a) is insolvent at the time of the transfer or is rendered insolvent by the transfer, (b) has unreasonably small capital with which to carry on its business or (c) intends to incur or believes it will incur debts beyond its ability to repay its debts as they mature. An unpaid creditor or an entity acting on behalf of a creditor (including, without limitation, a trustee or debtor‑in‑possession in a bankruptcy by us or B/E Aerospace or any of our respective subsidiaries) may bring a lawsuit alleging that the spin‑off or any of the related transactions constituted a constructive fraudulent conveyance. If a court accepts these allegations, it could impose a number of remedies, including, without limitation, voiding our claims against B/E Aerospace, requiring our stockholders to return to B/E Aerospace some or all of the shares of our common stock issued in the spin‑ off or providing B/E Aerospace with a claim for money damages against us in an amount equal to the difference between the consideration received by B/E Aerospace and the fair market value of our company at the time of the spin‑ off.

The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction’s law is applied. Generally, an entity would be considered insolvent if (1) the present fair saleable value of its assets is less than the amount of its liabilities (including contingent liabilities); (2) the present fair saleable value of its assets is less than its probable liabilities on its debts as such debts become absolute and matured; (3) it cannot pay its debts and other liabilities (including contingent liabilities and other commitments) as they mature; or (4) it has unreasonably small capital for the business in which it is engaged. We cannot assure you what standard a court would apply to determine insolvency or that a court would determine that we, B/E Aerospace or any of our respective subsidiaries were solvent at the time of or after giving effect to the spin‑off.

The distribution of our common stock is also subject to review under state corporate distribution statutes. Under the General Corporation Law of the State of Delaware (the “DGCL”), a corporation may only pay dividends to its stockholders either (1) out of its surplus (net assets minus capital) or (2) if there is no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Although B/E Aerospace intends to make the distribution of our common stock entirely from surplus, we cannot assure you that a court will not later determine that some or all of the distribution to B/E Aerospace stockholders was unlawful.

Although we believe that B/E Aerospace and KLX were each solvent at the time of the spin‑off (including immediately after the distribution of shares of KLX common stock), that we are able to repay our debts as they mature following the spin‑off and have sufficient capital to carry on our businesses and the spin‑off and the distribution was made entirely out of surplus in accordance with Section 170 of the DGCL, we cannot assure you that a court would reach the same conclusions in determining whether B/E Aerospace or we were insolvent at the time of, or after giving effect to, the spin‑off, or whether lawful funds were available for the separation and the distribution to B/E Aerospace’s stockholders.

A court could require that we assume responsibility for obligations allocated to B/E Aerospace under the Separation and Distribution Agreement.

Under the Separation and Distribution Agreement, from and after the spin‑ off, each of B/E Aerospace and we are responsible for the debts, liabilities and other obligations related to the business or businesses which it owns and operates following the consummation of the spin‑off. Although we do not expect to be liable for any obligations that are not allocated to us under the Separation and Distribution Agreement, a court could disregard the allocation agreed to between the parties, and require that we assume responsibility for obligations allocated to B/E Aerospace (including, for

34


 

example, environmental liabilities), particularly if B/E Aerospace were to refuse or were unable to pay or perform the allocated obligations.

Risks Relating to Our Common Stock

We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.

We do not currently intend to pay dividends. Our dividend policy will be established by our Board based on our financial condition, results of operations and capital requirements, as well as applicable law, regulatory constraints, industry practice and other business considerations that our Board considers relevant. In addition, the terms of the agreements governing debt that we incurred in connection with the spin‑off or in the future may limit or prohibit the payments of dividends. We cannot assure you that we will pay dividends in the future or continue to pay any dividends if we do commence the payment of dividends.

Additionally, our indebtedness could have important consequences for holders of our common stock. If we cannot generate sufficient cash flow from operations to meet our debt‑payment obligations, then our Board’s ability to declare dividends on our common stock will be impaired and we may be required to attempt to restructure or refinance our debt, raise additional capital or take other actions such as selling assets, reducing or delaying capital expenditures or reducing any proposed dividends. We cannot assure you that we will be able to effect any such actions or do so on satisfactory terms, if at all, or that such actions would be permitted by the terms of our debt or our other credit and contractual arrangements.

Certain provisions that our amended and restated certificate of incorporation and amended and restated bylaws contain, certain provisions of Delaware law may prevent or delay an acquisition of our Company or other strategic transactions, which could decrease the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with our Board rather than to attempt a hostile takeover. These provisions include, among others:

·

the inability of our stockholders to call a special meeting;

·

rules regarding how stockholders may present proposals or nominate directors for election at annual meetings;

·

the division of our Board into three classes of directors, with each class serving a staggered three‑year term;

·

a provision that our stockholders may only remove directors with cause and by the affirmative vote of at least at least 662/3 percent of our voting stock;

·

the ability of our directors, and not stockholders, to fill vacancies on our Board; and

·

the requirement of the affirmative vote of stockholders holding at least 662/3 percent of our voting stock to amend our amended and restated bylaws and certain provisions in our amended and restated certificate of incorporation, including those provisions providing for a classified board, provisions regarding the filling of vacancies on the Board and provisions providing for the removal of directors.

In addition, because we have not chosen to be exempt from Section 203 of the DGCL, this provision could also delay or prevent a change of control that some stockholders may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15 percent of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three‑year period following the date on which that person or its affiliates becomes the holder of more than 15 percent of the corporation’s outstanding voting stock.

35


 

We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board and by providing our Board with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board determines is not in the best interests of our Company and our stockholders. These provisions may also prevent  or discourage attempts to remove and replace incumbent directors.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

As of January 31, 2018, we had 59 principal operating facilities, which comprise an aggregate of approximately 2.4 million square feet of space. The following table describes the principal facilities and indicates the location, function, approximate size and ownership type of each location.

36


 

 

 

 

 

 

 

 

 

City

    

Segment

    

Sq. Feet

    

Ownership

 

Doral, FL

 

ASG

 

504,200

 

Lease

 

Kaltenkirchen, Germany

 

ASG

 

297,100

 

Lease

 

Wichita, KS

 

ASG

 

80,000

 

Lease

 

Hamburg, Germany

 

ASG

 

80,000

 

Lease

 

O'Fallon, MO

 

ASG

 

77,000

 

Lease

 

Evans City, PA

 

ESG

 

70,600

 

Own

 

Northborough, MA

 

ASG

 

60,800

 

Lease

 

Fort Smith, AR

 

ESG

 

60,000

 

Lease

 

Burgess Hill, UK

 

ASG

 

60,000

 

Lease

 

Carson, CA

 

ASG

 

56,500

 

Lease

 

Earth City, MO

 

ASG

 

48,800

 

Lease

 

Chandler, AZ

 

ASG

 

47,400

 

Lease

 

Senlis, France

 

ASG

 

46,300

 

Lease

 

Chambersburg, PA

 

ASG

 

41,300

 

Lease

 

Grand Prairie, TX

 

ASG

 

38,900

 

Lease

 

Cotulla, TX

 

ESG

 

37,900

 

Own

 

Houston, TX

 

ASG

 

35,100

 

Lease

 

Bridgeport, WV

 

ESG

 

32,500

 

Lease

 

Agawam, MA

 

ASG

 

31,100

 

Lease

 

LaSalle, CO

 

ESG

 

30,200

 

Lease

 

Bridgeport, WV

 

ESG

 

25,600

 

Lease

 

Boothwyn, PA

 

ASG

 

25,000

 

Lease

 

Williston, ND

 

ESG

 

24,900

 

Own

 

Midvale, OH

 

ESG

 

23,400

 

Lease

 

Eunice, NM

 

ESG

 

23,100

 

Lease

 

Singapore

 

ASG

 

21,700

 

Lease

 

Everett, WA

 

ASG

 

21,700

 

Lease

 

Houston, TX

 

ESG

 

20,500

 

Lease

 

Throop, PA

 

ASG

 

20,000

 

Lease

 

Greensboro, NC

 

ASG

 

20,000

 

Lease

 

Gillette, WY

 

ESG

 

19,500

 

Own

 

Banyo QLD, Australia

 

ASG

 

19,400

 

Lease

 

Bossier City, LA

 

ESG

 

18,000

 

Lease

 

Simpson District, WV

 

ESG

 

18,000

 

Lease

 

Kenedy, TX

 

ESG

 

17,800

 

Lease

 

Gillette, WY

 

ESG

 

17,500

 

Lease

 

Wellington, FL

 

Corporate Administrative Headquarters

 

17,000

 

Lease

 

San Angelo, TX

 

ESG

 

16,800

 

Lease

 

Oklahoma City, OK

 

ESG

 

16,600

 

Lease

 

Vernal, UT

 

ESG

 

16,000

 

Lease

 

Paramus, NJ

 

ASG

 

15,500

 

Lease

 

Johnstown, CO

 

ESG

 

14,800

 

Own

 

Rock Springs, WY

 

ESG

 

14,300

 

Lease

 

Tioga, PA

 

ESG

 

14,000

 

Lease

 

Rzeszow, Poland

 

ASG

 

13,700

 

Lease

 

Casper, WY

 

ESG

 

13,600

 

Lease

 

Bossier City, LA

 

ESG

 

13,300

 

Lease

 

Sterling, CO

 

ESG

 

13,000

 

Lease

 

Weatherford, TX

 

ESG

 

12,600

 

Own

 

Platteville, CO

 

ESG

 

12,500

 

Own

 

Midland, TX

 

ESG

 

12,400

 

Lease

 

Houston, TX

 

ESG

 

12,300

 

Lease

 

Williston, ND

 

ESG

 

12,300

 

Own

 

Lewiston, ME

 

ASG

 

12,000

 

Lease

 

Dickinson, ND

 

ESG

 

11,600

 

Lease

 

Midland, TX

 

ESG

 

10,900

 

Lease

 

Singapore

 

ASG

 

10,500

 

Lease

 

Midland, TX

 

ESG

 

10,100

 

Lease

 

Bridgeport, WV

 

ESG

 

10,000

 

Lease

 

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We believe that our facilities are suitable for their present intended purposes and are adequate for our present and anticipated level of operations.

ITEM 3.  LEGAL PROCEEDINGS

We are 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 our business, results of operations or financial condition.

There are no material pending legal proceedings, other than the ordinary routine litigation incidental to the business discussed above, to which we, or any of our subsidiaries, are a party or of which any of our property is the subject. See Note 8. Commitments, Contingencies and Off-Balance Sheet Arrangements.

ITEM 4.  MINE SAFETY DISCLOSURES

Not Applicable.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on the NASDAQ Global Select Market under the symbol “KLXI”. The following table sets forth, for the periods indicated, the range of high and low per share sales prices for the common stock as reported by NASDAQ.

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

    

High

    

Low

 

Fiscal 2016:

 

 

 

 

 

 

 

First Quarter

 

$

34.29

 

$

25.33

 

Second Quarter

 

 

35.25

 

 

28.65

 

Third Quarter

 

 

39.00

 

 

30.97

 

Fourth Quarter

 

 

50.33

 

 

33.17

 

 

 

 

 

 

 

 

 

Fiscal 2017:

 

 

 

 

 

 

 

First Quarter

 

$

52.40

 

$

42.45

 

Second Quarter

 

 

53.13

 

 

46.01

 

Third Quarter

 

 

55.76

 

 

45.73

 

Fourth Quarter

 

 

72.53

 

 

52.82

 

On March 13, 2018, the last reported sale price of our common stock as reported by NASDAQ was $71.51 per share. As of such date, based on information provided to us by Computershare, our transfer agent, we had 1,451 registered holders, and because many of these shares are held by brokers and other institutions on behalf of the beneficial holders, we are unable to estimate the number of beneficial stockholders represented by these holders of record.

39


 

Picture 3

 

Our share price has increased approximately 38% and 91% over the last 12 and 18 months, respectively, for the period ended December 22, 2017, which was the date of the Company’s strategic alternatives announcement.

We do not currently intend to pay dividends. Our Board will establish our dividend policy based on our financial condition, results of operations and capital requirements, as well as applicable law, regulatory constraints, industry practice and other business considerations that our Board considers relevant. The terms of our debt agreements contain restrictions on our ability to pay dividends. The terms of agreements governing debt that we may incur in the future may also limit or prohibit dividend payments. Accordingly, we cannot assure you that we will either pay dividends in the future or continue to pay any dividend that we may commence in the future.

40


 

Unregistered Sales Of Equity Securities And Use Of Proceeds

Share Repurchases

($ in Millions, Except Shares and Per Share Data)

 

The following table presents the total number of shares of our common stock that we repurchased during the three months ended January 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

    

Total number of shares purchased1

    

Average price paid per share2

    

Total number of shares purchased as part of publicly announced plans or programs3

    

Approximate dollar value of shares that may yet be purchased under the plans or programs

 

November 1, 2017 - November 30, 2017

 

 

3,741

 

$

53.60

 

 

 —

 

$

118.7

 

December 1, 2017 - December 31, 2017

 

 

703,421

 

 

68.82

 

 

 —

 

 

118.7

 

January 1, 2018 – January 31, 2018

 

 

1,872

 

 

69.20

 

 

 —

 

 

118.7

 

Total

 

 

709,034

 

 

 

 

 

 —

 

 

 

 


(1)

Includes shares purchased from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting of restricted stock grants under the Company’s Long-Term Incentive Plan.

(2)

The average price paid per share of common stock repurchased under the stock repurchase program includes the commissions paid to the brokers.

(3)

In November 2014, our board of directors authorized a share repurchase program for the repurchase of outstanding shares of the Company’s common stock having an aggregate purchase price up to $250. In January 2016, our board of directors authorized management to repurchase up to $100 of the Company’s common stock under the existing $250 share repurchase program. In March 2017, our board of directors authorized an increase in the Company’s share repurchase authorization from $100 to $200 under the existing $250 repurchase program.

 

 

ITEM 6.  SELECTED FINANCIAL DATA

In this section, dollar amounts are shown in millions, except for per share data or as otherwise specified.

The following tables present a summary of selected historical consolidated and combined financial data for the periods indicated below. We derived the selected historical condensed consolidated and combined statements of earnings data for the years ended January 31, 2018, 2017 and 2016 and the balance sheet data as of January 31, 2018 and 2017 from our audited consolidated and combined financial statements included elsewhere in this Form 10‑K. We derived the selected historical financial data as of January 31, 2016 and 2015 and December 31, 2014 and 2013, and for the fiscal years ended December 31, 2014 and 2013 and for the one-month transition period ended January 31, 2015 from audited financial statements.

The historical statements of earnings and comprehensive income for periods prior to December 16, 2014 reflect allocations of general corporate expenses from B/E Aerospace including, but not limited to, executive management, finance, legal, information technology, human resources, employee benefits administration, treasury, risk management, procurement and other shared services. The allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenues generated, costs incurred, headcount or other measures. Our management considers these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, KLX. The allocations may not, however, reflect the expense we would have incurred as a stand‑alone company for such periods. Actual costs that may have been incurred if we had been a stand‑alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.

The financial information for periods prior to the spin-off from B/E Aerospace on December 16, 2014 included in this Form 10‑K may not necessarily reflect our financial position, results of operations and cash flows as if we had

41


 

operated as a stand‑alone public company during such periods. Accordingly, our historical results should not be relied upon as an indicator of our future performance.

In presenting the financial data in conformity with GAAP, we are required to make estimates and assumptions that affect the amounts reported. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies,” included elsewhere in this Form 10‑K for a detailed discussion of the accounting policies that we believe require subjective and complex judgments that could potentially affect reported results.

The following selected historical financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated and combined financial statements and related notes included elsewhere in this Form 10‑K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Month Ended

 

    

January 31,

2018

    

January 31,

2017

    

January 31,

2016

    

December 31,

2014

    

December 31,

2013

 

January 31,

2015

Statements of Earnings Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,740.8

 

$

1,494.1

 

$

1,567.4

 

$

1,695.7

 

$

1,291.6

 

$

133.0

Cost of sales(1)

 

 

1,263.8

 

 

1,126.1

 

 

1,202.4

 

 

1,194.9

 

 

872.8

 

 

95.6

Selling, general and administrative(1)

 

 

260.7

 

 

238.6

 

 

261.6

 

 

254.0

 

 

180.3

 

 

19.7

Goodwill impairment charge

 

 

 —

 

 

 —

 

 

310.4

 

 

 —

 

 

 —

 

 

 —

Long-lived asset impairment charge

 

 

 —

 

 

 —

 

 

329.8

 

 

 —

 

 

 —

 

 

 —

Operating earnings (loss)

 

 

216.3

 

 

129.4

 

 

(536.8)

 

 

246.8

 

 

238.5

 

 

17.7

Interest expense (income), net

 

 

75.8

 

 

75.9

 

 

77.3

 

 

3.0

 

 

(1.0)

 

 

6.3

Earnings (loss) before income taxes

 

 

140.5

 

 

53.5

 

 

(614.1)

 

 

243.8

 

 

239.5

 

 

11.4

Income taxes(2)

 

 

87.1

 

 

5.3

 

 

(228.3)

 

 

155.7

 

 

89.1

 

 

4.3

Net earnings (loss)

 

$

53.4

 

$

48.2

 

$

(385.8)

 

$

88.1

 

$

150.4

 

$

7.1

Basic net earnings (loss) per share(3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

1.06

 

$

0.93

 

$

(7.39)

 

$

1.69

 

$

2.88

 

$

0.14

Weighted average common shares

 

 

50.5

 

 

51.8

 

 

52.2

 

 

52.2

 

 

52.2

 

 

52.2

Diluted net earnings (loss) per share(3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

1.04

 

$

0.92

 

$

(7.39)

 

$

1.68

 

$

2.88

 

$

0.14

Weighted average common shares

 

 

51.3

 

 

52.2

 

 

52.2

 

 

52.3

 

 

52.3

 

 

52.3

Balance Sheet Data (end of period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

1,743.5

 

$

1,702.5

 

$

1,761.6

 

$

1,788.4

 

$

1,366.1

 

$

1,792.0

Goodwill, intangible and other assets, net

 

 

1,398.1

 

 

1,343.4

 

 

1,244.3

 

 

1,792.3

 

 

1,417.6

 

 

1,766.4

Total assets

 

 

3,790.0

 

 

3,698.3

 

 

3,691.0

 

 

4,280.6

 

 

3,064.0

 

 

4,224.6

Stockholders’ equity

 

 

2,269.9

 

 

2,221.1

 

 

2,202.5

 

 

2,620.3

 

 

2,798.7

 

 

2,601.1

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

66.1

 

 

66.9

 

 

75.0

 

 

68.0

 

 

27.8

 

 

7.3


(1)

Cost of sales and selling, general and administrative (“SG&A”) expense include $0.4 and $5.8, respectively, of costs primarily associated with the process being conducted by our Board of Directors to review strategic alternatives, the transition to the new ASG global distribution and operations center, a restructuring of the Eagle Ford Geo Region, which was the ESG segment’s only unprofitable region and other matters for the year ended January 31, 2018. Cost of sales and SG&A expense include $30.3 and $37.2, respectively, of business separation and acquisitionrelated costs for the year ended January 31, 2016. Cost of sales and SG&A expense include $3.5 and $53.4, respectively, of acquisitionrelated costs for the year ended December 31, 2014.

(2)

For the year ended January 31, 2018 the Company was required to revalue its deferred tax assets as a result of recently enacted tax legislation. This revaluation and a change to the state tax rate resulted in a one-time non-cash tax charge of $43.3.

(3)

On December 16, 2014, B/E Aerospace, Inc. distributed to its stockholders of record as of the close of business on December 5, 2014 one share of KLX common stock for every two shares of B/E’s common stock held as of the

42


 

record date. Basic and diluted earnings per common share and the average number of common shares outstanding were calculated using the number of KLX common shares outstanding immediately following the distribution. See Note 11, Stockholders’ Equity, of the notes to the Consolidated and Combined Financial Statements for information regarding earnings per common share.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this section, dollar amounts are shown in millions, except for per share data or as otherwise specified.

Overview

The Spin‑off

On December 16, 2014, B/E Aerospace distributed 100% of the outstanding shares of common stock of KLX to the B/E stockholders of record in a transaction intended to be tax‑free to B/E Aerospace, KLX and our initial stockholders for U.S. federal income tax purposes (other than with respect to any cash received in lieu of fractional shares) (“Spin-Off”).

As planned, subsequent to the Spin‑Off, we started bringing some of the functions that were previously provided to us through corporate allocations from B/E Aerospace in‑house. We entered into certain agreements with B/E Aerospace relating to transition services and IT services through April 2017. Annual charges under those agreements for services provided to us by B/E Aerospace were not material for the year ended January 31, 2018 and totaled $8.7 for the year ended January 31, 2017. In addition, at the time of the Spin-Off, we entered into an Employee Matters Agreement and a tax sharing and indemnification agreement with B/E Aerospace. We also entered into new financing arrangements in connection with the Spin‑Off. See “Liquidity and Capital Resources—New Financing Arrangements.”

Company Overview

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

Immediately prior to the end of January 2018, we acquired two new product lines. The first purchase includes high performance fasteners and precision components and assemblies dedicated to aircraft engine manufacturing. The second product line will enable us to offer our customers technical products, systems and expertise in motion and control applications, including hydraulics, pneumatics, fluid connectors, filtration, electrical control systems, seals, compressors and engineered systems for both OEM and aftermarket applications. The total purchase price of these new product lines was approximately $65.0.

In May 2016, we acquired Herndon Aerospace & Defense, LLC (“Herndon”), a leading supply chain management and consumables hardware distributor serving principally military depot aftermarket customers, as well as commercial aerospace customers. The acquisition of Herndon expanded our capability to provide comprehensive

43


 

aftermarket supply chain management solutions to a broader portfolio of aftermarket customers. Herndon has established itself with the U.S. Department of Defense and its procurement arm, the Defense Logistics Agency (“DLA”), as a proven supplier of a broad range of consumables, resulting in a number of long term contracts with major military installations. Herndon’s status as an approved supplier to the DLA gives us the ability to expand our military aftermarket business as well as providing a platform for the introduction of new product offerings to Herndon’s existing customer base.

In 2013, we initiated an expansion into the U.S. onshore oil and gas services sector. We acquired seven companies in the business of providing technical services and related rental equipment to oil and gas exploration and production companies operating in every major onshore oil and gas region in the U.S. other than California, and have consolidated these companies into a single, coordinated business to most effectively serve our customers. As a result, we now provide a broad range of solutions and equipment which bring value‑added resources to a new customer base, often in remote locations. Our customers include independent and major oil and gas companies that are engaged in the exploration and production of oil and gas properties in North America, including in the Northeast (Marcellus and Utica Shale), Rocky Mountains (Williston and Piceance Basins), Southwest (Permian Basin and Eagle Ford) and Mid‑Continent. This business is operated within our ESG segment.

The oil and gas industry experienced a significant downturn commencing in late 2014 that continued throughout 2015 and most of 2016, during which time plummeting commodity prices driven by excess global supply resulted in record reductions in spending by all of our customers. At its low point in the second quarter of 2016, the domestic onshore drilling rig count was cut by over 75% from its peak in 2014 of 1,931 rigs to 404 rigs. As a result of the severity of this decline and the uncertainty of when industry conditions would improve, during the third quarter of 2015, we performed an interim asset impairment test in which we concluded the carrying value of our assets were impaired, resulting in an approximately $640.2 pre-tax ($402.7 after-tax) non-cash impairment charge.

 

Recent Developments

On December 22, 2017, we announced that our Board initiated a review of strategic alternatives to maximize stockholder value, including a possible sale of KLX or a sale of a division or divisions thereof. We have engaged a financial and legal advisor to assist in the process. There can be no assurance of the terms, timing or structure of any transactions, or whether any such transactions will take place at all, and any such transactions are subject to risks and uncertainties. As our Board conducts its review, we remain committed to executing on our business strategies.

 

Current Industry Conditions

Within our ASG segment, we generally derive our revenues from aerospace products and consumable products for both the new build market and the aftermarket. Our ASG business achieved a record in both revenues and profitability in 2017, as a result of solid demand from our commercial aerospace and defense manufacturing customers. Based upon aircraft manufacturers’ backlogs, we expect the current level of production to increase by a mid-single digit percentage growth rate in 2018. During 2017, ASG was awarded several new contracts and achieved certainmarket share gains. Defense spending has historically been driven by the timing of military aircraft orders and evolving government strategies and policies. We also support military depots for all five branches of our armed services, which maintain in-service aircraft and equipment. Defense spending began to decline in 2012 as the U.S. government implemented its sequestration program and began to sunset production of numerous military aircraft. As a result, we have seen demand from our military and defense manufacturing customers decline from peak levels experienced prior to 2012. Although defense spending has declined since 2012 due to the U.S. government’s sequestration program and sunsetting of numerous military aircraft platforms, industry analysts expect defense spending to increase at a mid-single digit annual rate over the next five years due to recently enacted legislation. Similarly, business jet manufacturing has declined since 2007 as a result of lower demand driven by austerity measures implemented by corporate customers, and the reduction in demand from businesses and countries affected by depressed conditions in the global oil and gas industry. However, this extended period of decline is expected to end in 2018 as business jet deliveries are expected to increase 4% in response to mid-single digit growth in business jet traffic and the introduction of new products expected to stimulate demand for new aircraft. Finally, our aftermarket revenues include both commercial aerospace customers and our business serving U.S. military depots. We expect aftermarket revenues to trend upwards in 2018 and beyond, as a larger percentage of the the approximately 12,500 new aircraft which have been delivered since 2009 begin to require their first heavy maintenance.

44


 

Within our ESG segment, the technological advancements over the past approximately thirty years that allow for enhanced recovery from shale formations underlying much of the major onshore oil and gas reservoirs in the United States have expanded the market for services to support the drilling, completion and production of onshore oil and gas wells dramatically. This has led to rapid growth in the market for the services we provide, culminating in record financial results for many oil field service providers in 2014. However, the global production of oil and gas that year led to an imbalance of supply and demand that caused a rapid decline in commodity prices starting in late 2014 and continuing throughout 2015 and into 2016. In response to the dramatic downturn in the global markets for oil and gas and associated oil field services that prevailed through all of 2015 and 2016, the oil field services industry experienced a deep retrenchment where both capacity of services across the industry was cut and the pricing of services became deeply depressed. In response to these industry conditions, we implemented a business alignment and cost reduction initiative in 2015 to optimize both the size of our operations and the alignment of our assets and personnel, to position KLX to be the pre-eminent provider of the services we offer in each of the geographic regions we serve as the industry recovered.

We began to see a stabilization in demand in late 2016, and with oil prices rising through the $40’s per barrel and into the $60’s in 2017, we have begun to benefit from our customers’ renewed commitment to their capital budgets. During the year ended January 31, 2018, ESG experienced a 109.3% increase in revenues as compared with the prior year, and operating earnings turned positive during the fourth quarter of 2017. We believe ESG’s Fiscal 2017 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.

 

Revenues by reportable segment for the years ended January 31, 2018, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended January 31,

 

 

 

    

2018

 

    

2017

 

 

2016

 

    

 

 

 

Revenues

 

% of Revenues

 

 

 

Revenues

 

% of Revenues

 

 

 

Revenues

 

% of Revenues

 

 

Aerospace Solutions Group

 

$

1,420.2

 

81.6

%

 

$

1,340.9

 

89.7

%

 

$

1,312.5

 

83.7

%

 

Energy Services Group

 

 

320.6

 

18.4

%

 

 

153.2

 

10.3

%

 

 

254.9

 

16.3

%

 

Total revenues

 

$

1,740.8

 

100.0

%

 

$

1,494.1

 

100.0

%

 

$

1,567.4

 

100.0

%

 

Substantially all of our sales and purchases are denominated in U.S. dollars. Revenues by domestic and foreign operations for the years ended January 31, 2018, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended January 31,

 

 

    

 

2018

    

2017

    

2016

 

Domestic

 

 

$

1,734.2

 

$

1,423.8

 

$

1,453.4

 

Foreign

 

 

 

6.6

 

 

70.3

 

 

114.0

 

Total revenues

 

 

$

1,740.8

 

$

1,494.1

 

$

1,567.4

 

 

Revenues by geographic region (based on destination) for the years ended January 31, 2018, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended January 31,

 

 

 

 

2018

 

2017

 

2016

 

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

Revenues

 

Revenues

 

Revenues

 

Revenues

 

Revenues

Revenues

 

 

United States

 

$

1,090.4

 

62.6

%  

$

865.6

 

57.9

%  

$

955.3

 

61.0

%

 

Europe

 

 

382.7

 

22.0

%  

 

387.9

 

26.0

%  

 

376.3

 

24.0

%

 

Asia, Pacific Rim, Middle East and other