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EX-32.2 - EX-32.2 - KLX Inc.klxi-20171031ex3227afb47.htm
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EX-31.2 - EX-31.2 - KLX Inc.klxi-20171031ex312ceca93.htm
EX-31.1 - EX-31.1 - KLX Inc.klxi-20171031ex311a91bbc.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

For The Quarterly Period Ended October 31, 2017

 

 

Commission File No. 001-36610

 

 

KLX INC.

 

(Exact name of registrant as specified in its charter)

 

 

 

 

 

DELAWARE

47-1639172

(State of Incorporation)

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

 

1300 Corporate Center Way

Wellington, Florida 33414

(Address of principal executive offices)

 

(561) 383-5100

(Registrant's telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

The registrant has one class of common stock, $0.01 par value, of which, 50,364,564 shares were outstanding as of December 4, 2017.

 

 


 

KLX INC.

 

Form 10-Q for the Quarter Ended October 31, 2017

 

Table of Contents

 

 

 

 

 

 

 

 

 

Page

Part I 

Financial Information

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of October 31, 2017 and January 31, 2017

3

 

 

 

 

Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three and Nine Months Ended October 31, 2017 and 2016

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2017 and 2016

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2. 

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

15

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

Item 4. 

Controls and Procedures

25

 

Part II

 

Other Information

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

Item 6. 

Exhibits

27

 

 

 

Signatures 

28

 

 

 

2


 

PART I - FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

KLX INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Millions, Except Share Data)

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

January 31,

 

 

 

2017

    

2017

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

287.5

 

$

277.3

 

Accounts receivable–trade, less allowance for doubtful accounts ($10.4 at October 31, 2017 and $13.5 at January 31, 2017)

 

 

317.9

 

 

261.3

 

Inventories, net

 

 

1,381.5

 

 

1,381.4

 

Other current assets

 

 

45.2

 

 

39.6

 

Total current assets

 

 

2,032.1

 

 

1,959.6

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation ($180.0 at October 31, 2017 and $149.4 at January 31, 2017)

 

 

270.5

 

 

248.3

 

Goodwill

 

 

1,018.4

 

 

996.4

 

Identifiable intangible assets, net

 

 

303.8

 

 

314.8

 

Deferred income taxes

 

 

122.9

 

 

147.0

 

Other assets

 

 

33.1

 

 

32.2

 

 

 

$

3,780.8

 

$

3,698.3

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

174.3

 

$

166.0

 

Accrued liabilities

 

 

119.6

 

 

91.1

 

Total current liabilities

 

 

293.9

 

 

257.1

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

1,183.9

 

 

1,182.0

 

Deferred income taxes

 

 

5.5

 

 

5.0

 

Other non-current liabilities

 

 

40.0

 

 

33.1

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Common stock, $0.01 par value; 250.0 million shares authorized; 53.5 million shares issued as of October 31, 2017 and January 31, 2017

 

 

0.5

 

 

0.5

 

Additional paid-in capital

 

 

2,707.5

 

 

2,686.5

 

Treasury stock: 3.1 million shares as of October 31, 2017 and 1.5 million shares as of January 31, 2017

 

 

(134.0)

 

 

(54.4)

 

Accumulated deficit

 

 

(262.4)

 

 

(328.0)

 

Accumulated other comprehensive loss

 

 

(54.1)

 

 

(83.5)

 

Total stockholders’ equity

 

 

2,257.5

 

 

2,221.1

 

 

 

$

3,780.8

 

$

3,698.3

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

 

KLX INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME (UNAUDITED)

(In Millions, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

 

 

2017

 

2016

 

2017

 

2016

 

Product revenues

 

$

367.6

 

$

348.8

 

$

1,072.2

 

$

1,011.1

 

Service revenues

 

 

89.1

 

 

40.2

 

 

226.4

 

 

109.6

 

Total revenues

 

 

456.7

 

 

389.0

 

 

1,298.6

 

 

1,120.7

 

Cost of sales - products

 

 

258.9

 

 

244.2

 

 

749.7

 

 

708.6

 

Cost of sales - services

 

 

72.8

 

 

44.8

 

 

192.4

 

 

136.1

 

Total cost of sales

 

 

331.7

 

 

289.0

 

 

942.1

 

 

844.7

 

Selling, general and administrative

 

 

64.5

 

 

61.4

 

 

195.1

 

 

181.8

 

Operating earnings

 

 

60.5

 

 

38.6

 

 

161.4

 

 

94.2

 

Interest expense

 

 

19.0

 

 

18.8

 

 

57.0

 

 

56.8

 

Earnings before income taxes

 

 

41.5

 

 

19.8

 

 

104.4

 

 

37.4

 

Income tax expense

 

 

15.7

 

 

 -

 

 

39.5

 

 

7.1

 

Net earnings

 

$

25.8

 

$

19.8

 

$

64.9

 

$

30.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(5.9)

 

 

(10.8)

 

 

29.4

 

 

(5.5)

 

Comprehensive income

 

$

19.9

 

$

9.0

 

$

94.3

 

$

24.8

 

Net earnings per share - basic

 

$

0.52

 

$

0.38

 

$

1.28

 

$

0.58

 

Net earnings per share - diluted

 

$

0.51

 

$

0.38

 

$

1.26

 

$

0.58

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


 

KLX INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Millions)

 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED

 

 

 

OCTOBER 31,

 

OCTOBER 31,

 

 

    

2017

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

 

Net earnings

 

$

64.9

 

$

30.3

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

49.5

 

 

50.6

 

Deferred income taxes

 

 

33.1

 

 

3.3

 

Non-cash compensation

 

 

19.3

 

 

14.7

 

Amortization of deferred financing fees

 

 

3.4

 

 

3.2

 

Provision for inventory write-downs

 

 

12.3

 

 

12.7

 

Change in allowance for doubtful accounts and sales returns

 

 

1.3

 

 

3.1

 

Loss on disposal of property and equipment

 

 

0.8

 

 

4.3

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

(57.5)

 

 

2.5

 

Inventories

 

 

(12.3)

 

 

3.2

 

Other current and non-current assets

 

 

(14.6)

 

 

9.3

 

Accounts payable

 

 

7.0

 

 

2.6

 

Other current and non-current liabilities

 

 

33.3

 

 

(0.7)

 

Net cash flows provided by operating activities

 

 

140.5

 

 

139.1

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(57.6)

 

 

(33.9)

 

Acquisitions, net of cash acquired

 

 

 -

 

 

(220.8)

 

Net cash flows used in investing activities

 

 

(57.6)

 

 

(254.7)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(78.7)

 

 

(13.5)

 

Cash proceeds from stock issuance

 

 

1.0

 

 

0.8

 

Net cash flows used in financing activities

 

 

(77.7)

 

 

(12.7)

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

5.0

 

 

(1.8)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

10.2

 

 

(130.1)

 

Cash and cash equivalents, beginning of period

 

 

277.3

 

 

427.8

 

Cash and cash equivalents, end of period

 

$

287.5

 

$

297.7

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

4.5

 

$

4.1

 

Interest

 

 

37.2

 

 

36.4

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

Accrued property additions

 

$

4.8

 

$

2.2

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

KLX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - In Millions, Except Per Share Data)

 

Note 1.Description of Business and Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown are of a normal recurring nature and have been reflected in the condensed consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the KLX Inc. (the “Company” or “KLX”) Annual Report on Form 10-K (the “2016 Form 10-K”) for the fiscal year ended January 31, 2017 (“Fiscal 2016”).

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates. The provision for inventory write downs has been reclassified and separately disclosed in the Company’s Condensed Consolidated Statements of Cash Flows for the nine months ended October 31, 2016 to conform to current year presentation.

 

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 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual reporting periods with early adoption permitted and should be applied prospectively to an award modified on or after the adoption date. The Company does not expect a material impact upon adoption of this ASU to its 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, 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.

6


 

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 Company is required to adopt ASU 2014-09 and the related updates on February 1, 2018 and intends to use the modified retrospective method of adoption, which will result in any changes identified being adjusted to the opening consolidated balance sheet as of February 1, 2018.  Prior period consolidated and combined statement of earnings and comprehensive income will remain unchanged. To assess the impact of this guidance, the Company has established a cross functional implementation project team, inventoried its revenue streams and contracts with customers, particularly large customer contracts, at its two segments and applied the principles of the guidance against a selection of contracts to assist in the determination of potential revenue accounting differences.  To date, no individually significant implementation matters have been identified.  The Company is in the process of developing its new accounting policies and determining the potential aggregate impact this guidance is likely to have on its financial statements as of our adoption date.

 

 

 

Note 3.Business Combinations

 

On May 17, 2016, the Company acquired Herndon Aerospace & Defense LLC (“Herndon”), an aftermarket aerospace supply chain management and consumables hardware distributor servicing principally aftermarket military depots as well as the commercial aerospace aftermarket, for an aggregate purchase price of $220.8 (net of cash acquired). The excess of the purchase price of the fair value of the net identifiable assets acquired approximated $119.6, of which $68.9 was allocated to identifiable intangible assets consisting of customer contracts and relationships and covenants not to compete and $50.7 is included in goodwill. The primary items that generated the goodwill recognized were the premium paid by the Company for future earnings potential and the value of the assembled workforce that does not qualify for separate recognition. The useful life assigned to the customer contracts and relationships is 20 years, and the covenants not to compete are being amortized over their contractual periods of five years.

 

The Herndon acquisition was accounted for as a purchase under FASB ASC 805, Business Combinations. The assets acquired and liabilities assumed have been reflected in the accompanying condensed consolidated balance sheets as of October 31, 2017 and January 31, 2017, and the results of operations are included in the accompanying condensed consolidated statements of earnings and comprehensive income from the date of acquisition.

 

The following table summarizes the fair values of assets acquired and liabilities assumed in the Herndon acquisition in accordance with ASC 805:

 

 

 

 

 

 

Accounts receivable-trade

 

$

12.3

 

Inventories

 

 

103.8

 

Other current and non-current assets

 

 

3.7

 

Property and equipment

 

 

2.1

 

Goodwill

 

 

50.7

 

Identified intangibles

 

 

68.9

 

Accounts payable

 

 

(9.7)

 

Other current and non-current liabilities

 

 

(11.0)

 

Total consideration paid

 

$

220.8

 

 

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

 

On a pro forma basis to give effect to the Herndon acquisition as if it occurred on February 1, 2016, revenues, net earnings and earnings per diluted share for the nine months ended October 31, 2016 were $1,171.0, $33.8 and $0.65, respectively.

 

7


 

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

 

 

Note 4.Inventories

 

Inventories, made up of finished goods, consist primarily of aerospace fasteners and consumables. The Company values inventories at the lower of cost 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. Reserves for excess and obsolete inventory were approximately $66.2 and $56.4 as of October 31, 2017 and January 31, 2017, respectively.

 

Note 5.Goodwill and Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2017

 

January 31, 2017

 

 

 

Useful Life

 

Original

 

Accumulated

 

Net Book

 

Original

 

Accumulated

 

Net Book

 

 

 

(Years)

 

Cost

 

Amortization

 

Value

 

Cost

 

Amortization

 

Value

 

Customer contracts and relationships

 

8

-

30

 

$

403.6

 

$

122.5

 

$

281.1

 

$

422.0

 

$

129.1

 

$

292.9

 

Covenants not to compete

 

5

 

 

2.2

 

 

0.6

 

 

1.6

 

 

5.5

 

 

3.6

 

 

1.9

 

Developed technologies

 

15

 

 

3.3

 

 

0.4

 

 

2.9

 

 

3.3

 

 

0.2

 

 

3.1

 

Trade names

 

Indefinite

 

 

18.2

 

 

 -

 

 

18.2

 

 

16.9

 

 

 -

 

 

16.9

 

 

 

 

 

 

 

$

427.3

 

$

123.5

 

$

303.8

 

$

447.7

 

$

132.9

 

$

314.8

 

 

Amortization expense associated with identifiable intangible assets was $4.9 and $4.8 for the three months ended October 31, 2017 and 2016, respectively, and $14.5 and $14.7 for the nine months ended October 31, 2017 and 2016, 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 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 increased by $22.0 as compared to January 31, 2017 primarily as a result of foreign currency translation adjustments.

 

Note 6. Related Party Transactions

 

On December 17, 2014, B/E Aerospace, Inc. (“B/E Aerospace”) created an independent public company through a spin-off of its ASG and Energy Services Group (“ESG”) businesses to B/E Aerospace’s stockholders (“Spin-Off”).  Following the Spin-Off, the Company created in-house substantially all of the

8


 

functions that were previously provided to it by B/E Aerospace. The Company entered into certain agreements with B/E Aerospace related to transition services and IT services through April 2017. In addition, the Company entered into an employee matters agreement and a tax sharing and indemnification agreement with B/E Aerospace in connection with the Spin-Off. Expenses incurred under those agreements were not material for the three and nine months ended October 31, 2017 and were $2.1 and $7.1 for the three and nine months ended October 31, 2016, respectively.

 

On April 13, 2017, B/E Aerospace was sold to Rockwell Collins, Inc. and is no longer a related party. Sales to B/E Aerospace were $4.4 through April 12, 2017 and $5.4 and $18.6 for the three and nine months ended October 31, 2016, respectively.

 

Note 7.Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

January 31, 

 

 

 

2017

    

2017

 

Accrued salaries, vacation and related benefits

 

$

38.6

 

$

31.6

 

Accrued commissions

 

 

8.2

 

 

8.7

 

Income taxes payable

 

 

12.7

 

 

10.3

 

Accrued interest

 

 

29.4

 

 

11.7

 

Other accrued liabilities

 

 

30.7

 

 

28.8

 

 

 

$

119.6

 

$

91.1

 

 

 

 

 

 

 

 

Note 8.Long-Term Debt

 

As of October 31, 2017, long-term debt consisted of $1,200.0 aggregate principal amount of the Company’s 5.875% senior unsecured notes due 2022 (the “5.875% Notes”). On a net basis, after taking into consideration the debt issue costs for the 5.875% Notes total debt was $1,183.9.  As of October 31, 2017, the Company also had a $750.0 undrawn secured revolving credit facility pursuant to a credit agreement dated as of December 16, 2014 and amended and restated on May 19, 2015 (the “Revolving Credit Facility”).

 

Borrowings under the Revolving Credit Facility bear interest at an annual rate equal to the London interbank offered rate (“LIBOR”) (as defined in the Revolving Credit Facility) plus the applicable margin (as defined).  No amounts were outstanding under the Revolving Credit Facility as of October 31, 2017 or January 31, 2017.

 

The Revolving Credit Facility is tied to a borrowing base formula and has no maintenance financial covenants.  This Revolving Credit Facility matures in May 2020. The credit agreement is collateralized by the Company’s assets and contains customary affirmative covenants, negative covenants, restrictions on the payment of dividends and the repurchase of our stock, and conditions precedent for borrowings, all of which were met as of October 31, 2017.

 

Letters of credit issued under the Revolving Credit Facility aggregated $5.5 and $5.5 at October 31, 2017 and January 31, 2017, respectively.

 

Note 9.Fair Value Measurements

 

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

 

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

 

9


 

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

 

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

 

The carrying amounts of cash and cash equivalents (which the Company classifies as Level 1 assets), accounts receivable – trade and accounts payable represent their respective fair values due to their short-term nature. There was no debt outstanding under the Revolving Credit Facility as of October 31, 2017. The fair value of the Company’s 5.875% Notes, based on market prices for publicly-traded debt (which the Company classifies as Level 2 inputs), was $1,252.4 and $1,260.7 as of October 31, 2017 and January 31, 2017, respectively.

 

Note 10.Commitments, Contingencies and Off-Balance Sheet Arrangements

 

Lease Commitments - The Company finances its use of certain facilities and equipment under committed lease arrangements provided by various institutions. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on the condensed consolidated balance sheets. At October 31, 2017, future minimum lease payments under these arrangements approximated $113.0, the majority of which related to long-term real estate leases.

 

Future payments under operating leases with terms greater than one year as of October 31, 2017 are as follows:

 

 

 

 

 

 

Year Ending January 31,

    

 

 

 

2018

 

$

7.3

 

2019

 

 

26.9

 

2020

 

 

23.2

 

2021

 

 

18.8

 

2022

 

 

15.2

 

Thereafter

 

 

21.6

 

Total

 

$

113.0

 

 

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.

 

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

10


 

protections generally include the payment of severance and related benefits under certain circumstances in the event of a change of control.

 

Note 11.Accounting for Stock-Based Compensation

 

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

 

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

 

Compensation cost recognized during the three and nine months ended October 31, 2017 and 2016 related to KLX restricted stock and stock options was $6.1 and $4.8, and $18.7 and $14.3, respectively. Unrecognized compensation expense related to these grants was $26.5 at October 31, 2017.

 

KLX has established a qualified Employee Stock Purchase Plan, the terms of which allow for qualified employees (as defined in the Plan) to participate in the purchase of designated shares of KLX’s common stock at a price equal to 85% of the closing price on the last business day of each semiannual stock purchase period. The fair value of employee purchase rights represents the difference between the closing price of KLX’s shares on the date of purchase and the purchase price of the shares. Compensation cost was $0.1 and $0.1 for the three months ended October 31, 2017 and 2016, respectively, and $0.3 and $0.2 for the nine months ended October 31, 2017 and 2016, respectively.

 

Note 12.Segment Reporting

 

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

 

The 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

 

NINE MONTHS ENDED

 

 

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

Revenues

    

2017

    

2016

    

2017

    

2016

 

Aerospace Solutions Group

 

$

367.6

 

$

348.8

 

$

1,072.2

 

$

1,011.1

 

Energy Services Group

 

 

89.1

 

 

40.2

 

 

226.4

 

 

109.6

 

Total revenues

 

 

456.7

 

 

389.0

 

 

1,298.6

 

 

1,120.7

 

Operating earnings (loss) (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace Solutions Group

 

 

62.4

 

 

56.5

 

 

181.2

 

 

166.5

 

Energy Services Group

 

 

(1.9)

 

 

(17.9)

 

 

(19.8)

 

 

(72.3)

 

Total operating earnings

 

 

60.5

 

 

38.6

 

 

161.4

 

 

94.2

 

Interest expense

 

 

19.0

 

 

18.8

 

 

57.0

 

 

56.8

 

Earnings before income taxes

 

$

41.5

 

$

19.8

 

$

104.4

 

$

37.4

 


(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 nine months ended October 31, 2017 and 2016.

11


 

The following table presents capital expenditures by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

 

    

2017

    

2016

    

2017

    

2016

 

Aerospace Solutions Group

 

$

14.9

 

$

4.1

 

$

20.2

 

$

10.4

 

Energy Services Group

 

 

10.1

 

 

4.5

 

 

37.4

 

 

23.5

 

 

 

$

25.0

 

$

8.6

 

$

57.6

 

$

33.9

 

 

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

 

The following table presents goodwill by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

January 31, 

 

 

    

2017

    

2017

 

Aerospace Solutions Group

 

$

1,018.4

 

$

996.4

 

Energy Services Group

 

 

 -

 

 

 -

 

 

 

$

1,018.4

 

$

996.4

 

 

The following table presents total assets by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

January 31, 

 

 

    

2017

    

2017

 

Aerospace Solutions Group

 

$

3,496.6

 

$

3,471.4

 

Energy Services Group

 

 

284.2

 

 

226.9

 

 

 

$

3,780.8

 

$

3,698.3

 

 

Corporate assets (primarily cash and cash equivalents) of $352.8 and $378.2 at October 31, 2017 and January 31, 2017, respectively, have been allocated to the above segments based on each segment’s percentage of total assets.

 

As discussed in Note 15 in the 2016 Form 10-K, Selected Quarterly Data (Unaudited), during our Fiscal 2016 preparation of the annual 10-K, the Company restated its 2016 interim financial statements to reflect the correction of errors that were identified related to the ASG segment’s product revenues and cost of sales. These errors related to the application of an accounting principle on claims related to the termination of programs under a long-term contract and other errors associated with inventory and sales reserves. The Company concluded the corrected errors were immaterial individually and in the aggregate, and the Company’s Condensed Consolidated Balance Sheet, Statement of Earnings and Comprehensive Income and Statement of Cash Flows reflect the correction of errors for the prior nine-month period ended October 31, 2016. The impact of the restatement to the nine-month period ended October 31, 2016 is summarized in the table below:

12


 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED

 

 

 

As Reported

 

As Restated

 

 

    

October 31,

    

October 31,

 

 

 

2016

 

2016

 

Accounts receivable - trade

 

$

294.0

 

$

266.2

 

Inventories, net

 

 

1,362.1

 

 

1,381.4

 

Total stockholders' equity

 

 

2,237.5

 

 

2,232.3

 

Total revenues

 

 

1,148.6

 

 

1,120.7

 

Total cost of sales

 

 

864.0

 

 

844.7

 

Income tax expense

 

 

10.3

 

 

7.1

 

Net earnings

 

 

35.6

 

 

30.3

 

Net earnings per share - basic

 

 

0.69

 

 

0.58

 

Net earnings per share - diluted

 

 

0.68

 

 

0.58

 

 

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

 

Note 13.Net Earnings Per Common Share

 

Basic net earnings per common share is computed using the weighted average common shares outstanding during the period. Diluted net earnings per common share is computed by using the weighted average common shares outstanding including the dilutive effect of stock options, shares issued under the KLX LTIP and restricted shares based on an average share price during the period. For the three months ended October 31, 2017 and 2016, no shares and approximately 0.4 shares of the Company’s common stock, respectively, and for the nine months ended October 31, 2017 and 2016, no shares and 0.3 shares, respectively, were excluded from the determination of diluted earnings per common share because their effect would have been anti-dilutive. The computations of basic and diluted earnings per share for the three and nine months ended October 31, 2017 and 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

OCTOBER 31,

 

 

    

2017

    

2016

    

2017

    

2016

 

Net earnings

    

$

25.8

    

$

19.8

 

$

64.9

    

$

30.3

  

(Shares in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

 

50.0

 

 

51.8

 

 

50.7

 

 

51.9

 

Effect of dilutive securities - dilutive securities

 

 

1.0

 

 

0.4

 

 

0.8

 

 

0.3