10-Q 1 klxi-20180731x10q.htm 10-Q klx_Current folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

For The Quarterly Period Ended July 31, 2018

 

 

Commission File No. 001-36610

 

 

KLX INC.

 

(Exact name of registrant as specified in its charter)

 

 

 

 

 

DELAWARE

47-1639172

(State of Incorporation)

(I.R.S. Employer Identification No.)

 

1300 Corporate Center Way

Wellington, Florida 33414

(Address of principal executive offices)

 

(561) 383-5100

(Registrant's telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [  ]

 

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

 

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

 

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

 

The registrant has one class of common stock, $0.01 par value, of which, 50,746,599 shares were outstanding as of August 23, 2018.

 

 


 

KLX INC.

 

Form 10-Q for the Quarter Ended July 31, 2018

 

Table of Contents

 

 

 

 

 

 

 

 

 

Page

Part I 

Financial Information

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of July 31, 2018 and January 31, 2018

3

 

 

 

 

Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three and Six Months Ended July 31, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2018 and 2017

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2. 

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

17

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

Item 4. 

Controls and Procedures

31

 

Part II

 

Other Information

 

 

 

 

Item 1A. 

Risk Factors

32

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

Item 6. 

Exhibits

34

 

 

 

Signatures 

36

 

 

 

2


 

PART I - FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

KLX INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Millions, Except Share Data)

 

 

 

 

 

 

 

 

 

 

 

July 31, 

 

January 31,

 

 

 

2018

    

2018

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

322.7

 

$

255.3

 

Accounts receivable–trade, less allowance for doubtful accounts ($12.0 at July 31, 2018 and January 31, 2018)

 

 

353.1

 

 

316.1

 

Inventories, net

 

 

1,418.0

 

 

1,407.9

 

Other current assets

 

 

46.9

 

 

51.7

 

Total current assets

 

 

2,140.7

 

 

2,031.0

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation ($210.4 at July 31, 2018 and $191.1 at January 31, 2018)

 

 

310.2

 

 

286.4

 

Goodwill

 

 

1,038.4

 

 

1,056.8

 

Identifiable intangible assets, net

 

 

295.8

 

 

308.6

 

Deferred income taxes

 

 

55.3

 

 

74.5

 

Other assets

 

 

35.7

 

 

32.7

 

 

 

$

3,876.1

 

$

3,790.0

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

217.6

 

$

180.8

 

Accrued liabilities

 

 

103.4

 

 

106.7

 

Total current liabilities

 

 

321.0

 

 

287.5

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

1,185.9

 

 

1,184.6

 

Deferred income taxes

 

 

5.5

 

 

5.9

 

Other non-current liabilities

 

 

44.1

 

 

42.1

 

 

 

 

 

 

 

 

 

Commitments, contingencies and off-balance sheet arrangements (Note 9)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Common stock, $0.01 par value; 250.0 million shares authorized; 54.6 million shares issued as of July 31, 2018 and January 31, 2018

 

 

0.5

 

 

0.5

 

Additional paid-in capital

 

 

2,768.8

 

 

2,756.5

 

Treasury stock: 3.8 million shares as of July 31, 2018 and January 31, 2018

 

 

(183.0)

 

 

(182.7)

 

Accumulated deficit

 

 

(214.2)

 

 

(280.0)

 

Accumulated other comprehensive loss

 

 

(52.5)

 

 

(24.4)

 

Total stockholders’ equity

 

 

2,319.6

 

 

2,269.9

 

 

 

$

3,876.1

 

$

3,790.0

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

KLX INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME (UNAUDITED)

(In Millions, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 

 

 

JULY 31, 

 

JULY 31, 

 

JULY 31, 

 

JULY 31, 

 

 

 

2018

 

2017

 

2018

 

2017

 

Product revenues

 

$

409.3

 

$

357.1

 

$

797.4

 

$

704.6

 

Service revenues

 

 

117.9

 

 

73.5

 

 

228.9

 

 

137.3

 

Total revenues

 

 

527.2

 

 

430.6

 

 

1,026.3

 

 

841.9

 

Cost of sales - products

 

 

291.8

 

 

248.3

 

 

569.5

 

 

490.8

 

Cost of sales - services

 

 

85.7

 

 

63.7

 

 

167.7

 

 

119.6

 

Total cost of sales

 

 

377.5

 

 

312.0

 

 

737.2

 

 

610.4

 

Selling, general and administrative

 

 

85.7

 

 

66.3

 

 

163.9

 

 

130.6

 

Operating earnings

 

 

64.0

 

 

52.3

 

 

125.2

 

 

100.9

 

Interest expense

 

 

18.9

 

 

19.0

 

 

37.8

 

 

38.0

 

Earnings before income taxes

 

 

45.1

 

 

33.3

 

 

87.4

 

 

62.9

 

Income tax expense

 

 

10.3

 

 

12.6

 

 

20.9

 

 

23.8

 

Net earnings

 

$

34.8

 

$

20.7

 

$

66.5

 

$

39.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(15.2)

 

 

30.5

 

 

(28.1)

 

 

35.3

 

Comprehensive income

 

$

19.6

 

$

51.2

 

$

38.4

 

$

74.4

 

Net earnings per share - basic

 

$

0.69

 

$

0.41

 

$

1.33

 

$

0.77

 

Net earnings per share - diluted

 

$

0.68

 

$

0.40

 

$

1.30

 

$

0.76

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


 

KLX INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Millions)

 

 

 

 

 

 

 

 

 

 

 

SIX MONTHS ENDED

 

 

 

JULY 31, 

 

JULY 31, 

 

 

    

2018

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

 

Net earnings

 

$

66.5

 

$

39.1

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

38.0

 

 

33.0

 

Deferred income taxes

 

 

19.6

 

 

21.0

 

Non-cash compensation

 

 

10.3

 

 

13.0

 

Amortization of deferred financing fees

 

 

2.3

 

 

2.2

 

Provision for inventory reserve

 

 

6.7

 

 

9.1

 

Change in allowance for doubtful accounts and sales returns

 

 

(0.2)

 

 

4.8

 

Loss on disposal of property and equipment

 

 

0.5

 

 

0.5

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(36.9)

 

 

(54.8)

 

Inventories

 

 

(16.8)

 

 

(25.6)

 

Other current and non-current assets

 

 

 -

 

 

(13.7)

 

Accounts payable

 

 

37.9

 

 

19.4

 

Other current and non-current liabilities

 

 

0.3

 

 

5.3

 

Net cash flows provided by operating activities

 

 

128.2

 

 

53.3

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(52.7)

 

 

(32.6)

 

Acquisitions, net of cash acquired

 

 

(2.4)

 

 

 -

 

Net cash flows used in investing activities

 

 

(55.1)

 

 

(32.6)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of treasury stock and other

 

 

(0.2)

 

 

(29.6)

 

Cash proceeds from stock issuance

 

 

1.2

 

 

1.0

 

Net cash flows provided by (used in) financing activities

 

 

1.0

 

 

(28.6)

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(6.7)

 

 

6.4

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

67.4

 

 

(1.5)

 

Cash and cash equivalents, beginning of period

 

 

255.3

 

 

277.3

 

Cash and cash equivalents, end of period

 

$

322.7

 

$

275.8

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

3.3

 

$

0.1

 

Interest

 

 

36.2

 

 

36.2

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

Accrued property additions

 

$

6.6

 

$

6.1

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

KLX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - In Millions, Except Per Share Data)

 

Note 1.Description of Business and Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown are of a normal recurring nature and have been reflected in the condensed consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the KLX Inc. (the “Company” or “KLX”) Annual Report on Form 10-K (the “2017 Form 10-K”) for the fiscal year ended January 31, 2018 (“Fiscal 2017”).

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.

 

On April 30, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Boeing Company, a Delaware corporation (“Boeing”), and Kelly Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Boeing (“Merger Sub”), as amended by Amendment No. 1 thereto, dated June 1, 2018, pursuant to which Boeing has agreed to acquire the Aerospace Solutions Group (“ASG”) business of KLX. In addition, the Company announced its intention to spin-off its Energy Services Group (“ESG”) business (“KLX Energy Services”) to its stockholders.  Upon the terms and subject to the conditions set forth in the Merger Agreement, at the closing, Merger Sub will merge with and into the Company, with the Company surviving as a direct or indirect wholly-owned subsidiary of Boeing (the “Merger”).

 

At the effective time of the Merger (the “Effective Time”), each share of KLX common stock that is issued and outstanding immediately prior to the Effective Time (other than shares of KLX common stock (i) held by KLX as treasury stock, (ii) held, directly or indirectly, by Boeing or Merger Sub immediately prior to the Effective Time or (iii) that are outstanding immediately prior to the Effective Time and that are held by any person who is entitled to demand, and properly demands, appraisal of such shares pursuant to, and who complies in all respects with, Section 262 of the Delaware General Corporation Law) will be converted into the right to receive $63.00 per share in cash, without interest. As a result, KLX shareholders as of the record date of the spin-off who are shareholders of KLX at the Effective Time will have received the $63.00 per share as well as the shares in the business being spun off, KLX Energy Services.

 

The respective boards of directors of KLX and Boeing have unanimously approved the Merger Agreement, and the board of directors of KLX has agreed to recommend that KLX’s stockholders adopt the Merger Agreement.  KLX has agreed, subject to certain exceptions, not to directly or indirectly solicit competing alternative proposals and to terminate all existing discussions, negotiations and communications with respect to any alternative proposal.

 

The completion of the Merger is subject to the satisfaction or waiver of customary closing conditions, including, among other things: (i) consummation of the ESG spin-off and (ii) applicable regulatory approvals (see Note 14 – Subsequent Events).

 

6


 

On July 16, 2018, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), in connection with the Company’s previously announced merger with a wholly owned subsidiary of Boeing, expired. The expiration of the waiting period under the HSR Act satisfies one of the conditions to the closing of the merger, which remains subject to other closing conditions in the Merger Agreement.

 

KLX and Boeing have made customary representations and warranties in the Merger Agreement.  The Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to (a) the conduct of KLX’s business between the date of the signing of the Merger Agreement and the consummation of the Merger and (b) the efforts of the parties to cause the Merger to be completed.

 

The Merger Agreement provides that Boeing may be required to pay KLX a termination fee equal to $175.0 and that KLX may be required to pay Boeing a termination fee equal to up to $175.0 if the Merger Agreement is terminated by KLX or Boeing under certain circumstances described in the Merger Agreement.

 

Note 2.Recent Accounting Pronouncements

 

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation–Stock Compensation (Topic 718). This ASU was issued to provide clarity and reduce diversity in practice regarding the application of guidance on the modification of equity awards. The ASU states that an entity should account for the effects of a modification unless all of the following are met: the fair value, vesting conditions and the classification of the instrument as equity or liability of the modified award is the same as that of the original award immediately before such award is modified. The guidance became effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual reporting periods. The adoption of ASU 2017-09 did not have a material impact on the Company’s condensed consolidated financial statements as the Company historically has accounted for all modifications in accordance with Topic 718 and has not been subject to the exception described under this ASU.

 

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

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which updated the guidance in ASC Topic 606, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB deferred the effective date for implementation of ASU 2014-09 by one year and during 2016, the FASB issued various related accounting standard updates, which clarified revenue accounting principles and provided supplemental adoption guidance. The guidance under ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within that year. The Company adopted the new standard and its related amendments (collectively known as ASC Topic 606) in the first quarter of 2018 using the modified retrospective method of adoption, which resulted in no changes to the opening consolidated balance sheet as of February 1, 2018. Prior period

7


 

consolidated statements of earnings and comprehensive income remain unchanged. The additional disclosures required by ASC Topic 606 have been included below and in Note 11.

 

Except for the changes below, no material changes have been made to the Company's significant accounting policies disclosed in Note 1, Description of Business and Summary of Significant Accounting Policies, in its 2017 Form 10-K.

 

Revenue from Contracts with Customers

 

Revenue Recognition— Under ASC Topic 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company recognizes revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery in accordance with the terms of the sales contract. Management provides allowances for credits and returns, based on historic experience, and adjusts such allowances as considered necessary.

 

In connection with the sales of its products, the Company also provides certain logistics services which include inventory management and replenishment, supply chain solutions such as third-party logistics programs, packaging and bar coding, parts kitting, quality assurance testing and inspection, purchasing assistance programs and electronic data interchange capability. The price of such services is generally included in the price of the products delivered to the customer, and revenues are recognized upon delivery of the product, at which point, the customer has obtained control of the Company’s product. The Company does not account for these service activities separate from the related part sales as the services are inputs required to fulfill part orders received from customers.

 

Service revenues from oilfield services (product/service lines (“PSLs”)) are recorded over time throughout and for the duration of the service or rental period. Contracts in the Company’s ESG segment are pursuant to a master services agreement (“MSA”) combined with a completed field ticket or a work order, which sets forth the details of the specific transaction including pricing.

 

Backlog is not a relevant measure for the Company’s ASG segment, given the long-term nature of its contracts with its customers. Few, if any, include minimum purchase requirements, annually or over the term of the agreement. The Company’s ESG segment operates under MSAs with its oil and gas customers, which set forth the terms and conditions for the provision of services and the rental of equipment. Rental tools and service contracts are typically based on a day rate with rates based on the type of equipment and competitive conditions. As a result, the Company does not record backlog.

8


 

 

 

Note 3.Business Combinations

 

The Company acquired two new product lines immediately prior to the end of the fourth quarter of Fiscal 2017. The first purchase includes high performance fasteners and precision components and assemblies dedicated to aircraft engine manufacturing. The second group of products will enable the Company to offer its 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 Company acquired the two product lines for an aggregate purchase price of $64.8, which were accounted for as purchases under FASB ASC 805, Business Combinations (“ASC 805”) and primarily consist of inventory, accounts receivable, goodwill and intangibles and accounts payable and other current liabilities. The acquisitions did not have a material impact on the condensed consolidated financial statements. The valuations of the acquired assets related to the product line acquisitions are not yet complete and, as such, the Company has not yet finalized its allocation of the purchase price for the acquisitions.

 

 

Note 4.Inventories

 

Inventories, made up of finished goods, consist primarily of aerospace fasteners and consumables. The Company values inventories at the lower of cost and net realizable value, using first‑in, first‑out or weighted average cost method. The Company reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical demand, estimated product demand to support contractual supply agreements with its customers and the age of the inventory, among other factors. Demand for the Company’s products can fluctuate from period to period depending on customer activity. In accordance with industry practice, inventories include amounts relating to long-term contracts with long production cycles, some of which are not expected to be realized within one year. In addition, the Company supports a substantial portion of the global fleet of aircraft in service, and in its capacity as a stocking distributor will acquire and hold inventories for aircraft maintenance at periodic intervals as mandated by the Federal Aviation Administration (“FAA”) or similar regulatory agencies. Based on historical experience, the support of the aftermarket activities with products such as those which the Company sells will necessitate holding inventory in excess of the amount required to support new build production activity contracts.  Obsolescence has historically been immaterial for the Company due to the long life of an aircraft and nature of the products sold by the Company. Inventory with a limited shelf life is continually monitored and reserved for in advance of expiration. The annual provision for inventory with limited shelf life has historically been immaterial. Inventory reserves were approximately $76.2 and $72.4 as of July 31, 2018 and January 31, 2018, respectively.

 

Note 5.Goodwill and Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31, 2018

 

January 31, 2018

 

 

 

Useful Life

 

Original

 

Accumulated

 

Net Book

 

Original

 

Accumulated

 

Net Book

 

 

    

(Years)

    

Cost

    

Amortization

    

Value

 

Cost

    

Amortization

    

Value

 

Customer contracts and relationships

 

10

-

30

 

$

410.2

 

$

136.7

 

$

273.5

 

$

413.6

 

$

128.8

 

$

284.8

 

Covenants not to compete

 

5

 

 

2.2

 

 

0.9

 

 

1.3

 

 

2.2

 

 

0.7

 

 

1.5

 

Developed technologies

 

15

 

 

3.3

 

 

0.6

 

 

2.7

 

 

3.3

 

 

0.5

 

 

2.8

 

Trade names

 

Indefinite

 

 

18.3

 

 

 -

 

 

18.3

 

 

19.5

 

 

 -

 

 

19.5

 

 

 

 

 

 

 

$

434.0

 

$

138.2

 

$

295.8

 

$

438.6

 

$

130.0

 

$

308.6

 

 

Amortization expense associated with identifiable intangible assets was $4.9 and $4.8 for the three months ended July 31, 2018 and 2017, respectively, and $9.9 and $9.6 for the six months ended July 31, 2018 and 2017, respectively. The Company currently expects to recognize amortization expense related to intangible assets of approximately $20.0 in each of the next five fiscal years (primarily related to our ASG

9


 

business). The future amortization amounts are estimates. Actual future amortization expense may be different due to future acquisitions, impairments, changes in amortization periods or other factors such as changes in exchange rates for assets acquired outside the United States. The Company expenses costs to renew or extend the term of a recognized intangible asset.  Goodwill decreased by $18.4 as compared to January 31, 2018 primarily as a result of foreign currency translation adjustments.

 

Note 6.Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

July 31, 

 

January 31, 

 

 

 

2018

    

2018

 

Accrued salaries, vacation and related benefits

 

$

37.7

 

$

37.2

 

Accrued commissions

 

 

7.7

 

 

10.9

 

Income taxes payable

 

 

11.4

 

 

10.7

 

Accrued interest

 

 

11.8

 

 

11.7

 

Other accrued liabilities

 

 

34.8

 

 

36.2

 

 

 

$

103.4

 

$

106.7

 

 

 

 

 

 

 

 

Note 7.Long-Term Debt

 

As of July 31, 2018, long-term debt consisted of $1,200.0 aggregate principal amount of the Company’s 5.875% senior unsecured notes due 2022 (the “5.875% Notes”). On a net basis, after taking into consideration the debt issue costs for the 5.875% Notes, total debt was $1,185.9.

 

On June 8, 2018, the Company amended its amended and restated secured revolving credit facility, dated May 19, 2015 (as amended, the “Revolving Credit Facility”) to provide flexibility to spin off its ESG business. In addition, on June 8, 2018, the Company elected to reduce the total amount available to $650.0. As of July 31, 2018, the Company had $650.0 available for borrowing under the Revolving Credit Facility.

 

Borrowings under the Revolving Credit Facility bear interest at an annual rate equal to the London interbank offered rate (“LIBOR”) (as defined in the Revolving Credit Facility) plus the applicable margin (as defined).  No amounts were outstanding under the Revolving Credit Facility as of July 31, 2018 or January 31, 2018.

 

The Revolving Credit Facility is tied to a borrowing base formula and has no maintenance financial covenants.  This Revolving Credit Facility matures in May 2020, is collateralized by the Company’s assets and contains customary affirmative covenants, negative covenants, restrictions on the payment of dividends and the repurchase of its stock, and conditions precedent for borrowings, all of which were met as of July 31, 2018.

 

Letters of credit issued under the Revolving Credit Facility aggregated $5.9 and $5.8 at July 31, 2018 and January 31, 2018, respectively.

 

Note 8.Fair Value Measurements

 

All short-term financial instruments are generally carried at amounts that approximate estimated fair value. The fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. Assets measured at fair value are categorized based upon the lowest level of significant input to the valuations.

 

Level 1 – quoted prices in active markets for identical assets and liabilities.

 

10


 

Level 2 – quoted prices for identical assets and liabilities in markets that are not active, or observable inputs other than quoted prices in active markets for identical assets and liabilities.

 

Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

 

The carrying amounts of cash and cash equivalents (which the Company classifies as Level 1 assets), accounts receivable – trade and accounts payable represent their respective fair values due to their short-term nature. There was no debt outstanding under the Revolving Credit Facility as of July 31, 2018. The fair value of the Company’s 5.875% Notes, based on market prices for publicly-traded debt (which the Company classifies as Level 2 inputs), was $1,242.0 and $1,251.0 as of July 31, 2018 and January 31, 2018, respectively.

 

Note 9.Commitments, Contingencies and Off-Balance Sheet Arrangements

 

Lease Commitments - The Company finances its use of certain facilities and equipment under committed lease arrangements provided by various institutions. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on the condensed consolidated balance sheets. At July 31, 2018, future minimum lease payments under these arrangements approximated $191.8, the majority of which related to long-term real estate leases.

 

Future payments under operating leases with terms greater than one year as of July 31, 2018 are as follows:

 

 

 

 

 

 

Year Ending January 31,

    

 

 

 

2019

 

$

17.5

 

2020

 

 

34.3

 

2021

 

 

28.4

 

2022

 

 

22.1

 

2023

 

 

16.4

 

Thereafter

 

 

73.1

 

Total

 

$

191.8

 

 

Litigation - The Company is a defendant in various legal actions arising in the normal course of business, the outcomes of which, in the opinion of management, neither individually nor in the aggregate are likely to result in a material adverse effect on the Company’s condensed consolidated financial statements.

 

Following KLX’s announcement of the merger, on July 2, 2018, KLX received a demand letter from counsel for a purported KLX stockholder seeking inspection of KLX’s books and records. After negotiation with counsel for this purported stockholder and pursuant to an agreement governing the confidentiality of any produced documents, KLX produced certain books and records in connection with the proposed merger between KLX and Boeing.

 

On July 6, 2018, a putative class action (the “Complaint”) was filed by a purported KLX stockholder in the United States District Court for the District of Delaware. The Complaint purports to bring the litigation as a class action on behalf of the public stockholders of KLX (the “Action”). The Complaint names as defendants the members of the board of directors of KLX and KLX. The Complaint alleges that KLX and the board of directors of KLX failed to disclose material information in KLX’s First Amended Preliminary Proxy Statement on Form 14A filed on June 28, 2018. The Complaint seeks, among other things, equitable relief, including to enjoin the closing of the merger, to direct disclosure of all material information in KLX’s proxy statement and to award plaintiff’s costs, including attorney’s and expert’s fees.

 

On August 15, 2018, the parties to the Action entered into a confidential Memorandum of Understanding (the "Memorandum of Understanding") providing for the dismissal of the Action with prejudice as to the plaintiff in the Action and without prejudice as to the putative class. While KLX believes that the

11


 

Action lacks merit and that the disclosures in the definitive proxy statement comply fully with applicable law, in order to avoid the expense and distraction of litigation, KLX agreed, pursuant to the terms of the confidential Memorandum of Understanding, to supplement the definitive proxy statement with certain supplemental disclosures, which it did on August 15, 2018. The confidential Memorandum of Understanding also outlined the terms of the plaintiff in the Action’s agreement in principle to dismiss the Complaint and release all claims which it has, has ever had, or could have asserted related to the Merger and disclosures related to the Merger. On August 22, 2018, the plaintiff filed a stipulation of dismissal. The counsel for the plaintiff has reserved the right to seek a mootness fee but has not yet made any specific demand for such a fee.

 

In the opinion of management, neither the demand letter, nor the Complaint are likely to result in a material adverse effect on the Company’s condensed consolidated financial statements.

 

Indemnities, Commitments and Guarantees - During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to other parties to certain acquisition agreements. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. Many of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments the Company could be obligated to make. However, the Company is unable to estimate the maximum amount of liability related to its indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events that are not reasonably determinable. Management believes that any liability for these indemnities, commitments and guarantees would not be material to the accompanying condensed consolidated financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.

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

 

Note 10.Accounting for Stock-Based Compensation

 

The Company has a Long-Term Incentive Plan (“LTIP”) under which the Company’s Compensation Committee has the authority to grant stock options, stock appreciation rights, restricted stock, restricted stock units or other forms of equity-based or equity-related awards.

 

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

 

Compensation cost related to KLX restricted stock and stock options was $4.9 and $6.9 for the three months ended July 31, 2018 and 2017, respectively, and $9.8 and $12.6 for the six months ended July 31, 2018 and 2017, respectively. Unrecognized compensation expense related to these grants was $28.8 at July 31, 2018. The Company will recognize a charge equal to the then unrecognized compensation cost of the grants resulting from the acceleration of shares under the LTIP upon the closing of the sale to Boeing.

 

KLX has established a qualified Employee Stock Purchase Plan (“ESPP”), the terms of which allow for qualified employees (as defined in the Plan) to participate in the purchase of designated shares of KLX’s common stock at a price equal to 85% of the closing price on the last business day of each semiannual stock purchase period. The fair value of employee purchase rights represents the difference between the closing price of KLX’s shares on the date of purchase and the purchase price of the shares. Compensation cost was $0.1 and $0.1 for the three months ended July 31, 2018 and 2017, respectively, and $0.2 and $0.2

12


 

for the six months ended July 31, 2018 and 2017, respectively. Further option periods after the completion of the option period ending June 30, 2018 under the ESPP were suspended pursuant to the Merger Agreement. If the Merger is completed, the ESPP will be terminated.

 

Note 11.Segment Reporting

 

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

 

The Company has not included product line information for the ASG segment due to the similarity of the product offerings and services and the impracticality of determining such information.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 

 

 

JULY 31, 

 

JULY 31, 

 

JULY 31, 

 

JULY 31, 

 

Revenues

    

2018

    

2017

    

2018

    

2017

 

Aerospace Solutions Group

 

$

409.3

 

$

357.1

 

$

797.4

 

$

704.6

 

Energy Services Group

 

 

117.9

 

 

73.5

 

 

228.9

 

 

137.3

 

Total revenues

 

 

527.2

 

 

430.6

 

 

1,026.3

 

 

841.9

 

Operating earnings (loss) (1)(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace Solutions Group

 

 

51.8

 

 

60.1

 

 

106.5

 

 

118.8

 

Energy Services Group

 

 

12.2

 

 

(7.8)

 

 

18.7

 

 

(17.9)

 

Total operating earnings

 

 

64.0

 

 

52.3

 

 

125.2

 

 

100.9

 

Interest expense

 

 

18.9

 

 

19.0

 

 

37.8

 

 

38.0

 

Earnings before income taxes

 

$

45.1

 

$

33.3

 

$

87.4

 

$

62.9

 


(1)

Operating earnings (loss) include an allocation of employee benefits and general and administrative costs primarily based on the proportion of each segment’s number of employees for the three and six months ended July 31, 2018 and 2017.

(2)

Costs related to the spin-off and costs associated with the sale of the business to Boeing have been allocated entirely to ESG and ASG, respectively during the three and six months ended July 31, 2018.

 

The following table presents capital expenditures by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 

 

 

JULY 31, 

 

JULY 31, 

 

JULY 31, 

 

JULY 31, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Aerospace Solutions Group

 

$

7.1

 

$

2.6

 

$

17.4

 

$

5.3

 

Energy Services Group

 

 

18.6

 

 

15.5

 

 

35.3

 

 

27.3

 

 

 

$

25.7

 

$

18.1

 

$

52.7

 

$

32.6

 

 

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

 

Goodwill was $1,038.4 and $1,056.8 as of July 31, 2018 and January 31, 2018, respectively, and is all related to ASG.

 

The following table presents total assets by reportable segment:

 

 

 

 

 

 

 

 

 

 

July 31, 

 

January 31, 

 

 

    

2018

    

2018

 

Aerospace Solutions Group

 

$

3,543.5

 

$

3,495.8

 

Energy Services Group

 

 

332.6

 

 

294.2

 

 

 

$

3,876.1

 

$

3,790.0

 

13


 

Corporate assets (primarily cash and cash equivalents) of $319.6 and $263.6 at July 31, 2018 and January 31, 2018, respectively, have been allocated to the above segments based on each segment’s percentage of total assets.

 

The Company operates principally in three geographic areas, the United States, Europe (primarily Germany) and emerging markets, such as Asia, the Pacific Rim and the Middle East. The following table presents revenues by reportable segment based on the originating location for the three and six months ended July 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 

 

 

JULY 31, 2018

 

JULY 31, 2018

 

 

 

Aerospace Solutions Group

    

Energy Services Group

    

Aerospace Solutions Group

    

Energy Services Group

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

407.6

 

$

117.9

 

$

793.7

 

$

228.9

 

Foreign

 

 

1.7

 

 

 —

 

 

3.7

 

 

 —

 

 

 

$

409.3

 

$

117.9

 

$

797.4

 

$

228.9

 

 

Segment revenues by geographic area, based on destination, for the three and six months ended July 31, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended July 31, 2018

 

 

 

Aerospace Solutions Group

 

 

Energy Services Group

 

 

 

 

Revenues

 

% of Revenues

 

 

Revenues

 

% of Revenues

 

 

United States

 

$

221.2

 

54.0

%  

 

$

117.9

 

100.0

%  

 

Europe

 

 

109.1

 

26.7

%  

 

 

 —

 

 —

%  

 

Asia, Pacific Rim, Middle East and other

 

 

79.0

 

19.3

%  

 

 

 —

 

 —

%  

 

Total revenues

 

$

409.3

 

100.0

%  

 

$

117.9

 

100.0

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended July 31, 2018

 

 

 

Aerospace Solutions Group

 

 

Energy Services Group

 

 

 

 

Revenues

 

% of Revenues

 

 

Revenues

 

% of Revenues

 

 

United States

 

$

438.8

 

55.0

%  

 

$

228.9

 

100.0

%  

 

Europe

 

 

207.8

 

26.1

%  

 

 

 —

 

 —

%  

 

Asia, Pacific Rim, Middle East and other

 

 

150.8

 

18.9

%  

 

 

 —

 

 —

%  

 

Total revenues

 

$

797.4

 

100.0

%  

 

$

228.9

 

100.0

%  

 

 

 

 

 

Note 12.Net Earnings Per Common Share

 

Basic net earnings per common share is computed using the weighted average common shares outstanding during the period. Diluted net earnings per common share is computed by using the weighted average common shares outstanding including the dilutive effect of stock options, shares issued under the KLX LTIP and restricted shares based on an average share price during the period. For the three and six months ended July 31, 2018 and 2017, no shares of the Company’s common stock were excluded from the determination of diluted earnings per common share because their effect would have been anti-dilutive. The computations of basic and diluted earnings per share for the three and six months ended July 31, 2018 and 2017 are as follows:

14


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 

 

 

JULY 31, 

 

JULY 31, 

 

JULY 31, 

 

JULY 31, 

 

 

    

2018

    

2017