UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For The Quarterly Period Ended April 30, 2018

Commission File No. 001-36610

KLX INC.

(Exact name of registrant as specified in its charter)

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, 50,741,488 shares were outstanding as of May 18, 2018.

KLX INC.

Form 10-Q for the Quarter Ended April 30, 2018

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

KLX INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Millions, Except Share Data)

See accompanying notes to condensed consolidated financial statements.

KLX INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME (UNAUDITED)

(In Millions, Except Per Share Data)

See accompanying notes to condensed consolidated financial statements.

KLX INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Millions)

See accompanying notes to condensed consolidated financial statements.

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 “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.

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, 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 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 Energy Services Group (“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 Aerospace Solutions Group (“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 do not record backlog.

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 valuation 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 $75.0 and $72.4 as of April 30, 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:

Amortization expense associated with identifiable intangible assets was $5.0 and $4.8 for the three months ended April 30, 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 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 $9.2 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:

Note 7.Long-Term Debt

As of April 30, 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 $1,185.2.  As of April 30, 2018, the Company also had a $750.0 undrawn secured revolving credit facility pursuant to a credit agreement dated as of December 16, 2014 and amended and restated on May 19, 2015 (the “Revolving Credit Facility”).

Borrowings under the Revolving Credit Facility bear interest at an annual rate equal to the London interbank offered rate (“LIBOR”) (as defined in the Revolving Credit Facility) plus the applicable margin (as defined).  No amounts were outstanding under the Revolving Credit Facility as of April 30, 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. 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 its stock, and conditions precedent for borrowings, all of which were met as of April 30, 2018.

Letters of credit issued under the Revolving Credit Facility aggregated $5.9 and $5.8 at April 30, 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.

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

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

The carrying amounts of cash and cash equivalents (which the Company classifies as Level 1 assets), accounts receivable – trade and accounts payable represent their respective fair values due to their short-term nature. There was no debt outstanding under the Revolving Credit Facility as of April 30, 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 $1,252.6 and $1,251.0 as of April 30, 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 April 30, 2018, future minimum lease payments under these arrangements approximated $188.4, the majority of which related to long-term real estate leases.

Future payments under operating leases with terms greater than one year as of April 30, 2018 are as follows:

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 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 recognized during the three months ended April 30, 2018 and 2017 related to KLX restricted stock and stock options was $4.9 and $5.7, respectively. Unrecognized compensation expense related to these grants was $33.3 at April 30, 2018.

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 semi‑annual 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 April 30, 2018 and 2017, respectively.

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:

The following table presents capital expenditures by reportable segment:

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

Goodwill was $1,047.6 and $1,056.8 as of April 30, 2018 and January 31, 2018, respectively, and is all related to ASG.

The following table presents total assets by reportable segment:

Corporate assets (primarily cash and cash equivalents) of $292.9 and $263.6 at April 30, 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 quarter ended April 30, 2018.

Segment revenues by geographic area, based on destination, for the quarter ended April 30, 2018 were as follows:

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 months ended April 30, 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 months ended April 30, 2018 and 2017 are as follows:

Note 13.Income Taxes

In accordance with FASB ASC 740, Income Taxes, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. As of April 30, 2018 and 2017, the Company had $9.6 and $8.5, respectively, of uncertain tax positions, including accrued interest of $1.4 and $1.2 at April 30, 2018 and 2017, respectively, all of which would affect the Company’s effective tax rate if recognized.

Pursuant to the terms of the Tax Sharing Agreement with our former parent, B/E Aerospace, the Company may be liable for income tax in certain foreign jurisdictions arising from the examination of tax years during which the Company was part of the B/E Group.  The statute of limitations in these foreign jurisdictions is open for tax years 2007-2014.

The Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Cut and Jobs Act of 2017 (the “2017 Tax Act”). SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting relating to the 2017 Tax Act under the Income Taxes Topic of the FASB ASC. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under the Income Taxes Topic of the FASB ASC is complete. To the extent that a company's accounting for certain income tax effects of the 2017 Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply the Income Taxes Topic of the FASB ASC on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act. The ultimate impact of the 2017 Tax Act in the Company's financial statements is provisional with regard to certain foreign tax provisions and may differ from its estimates due to changes in the interpretations and assumptions made by the Company as well as additional regulatory guidance that may be issued.  No changes were made to the estimate as of April 30, 2018.

Note 14.Subsequent Events

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”), pursuant to which Boeing has agreed to acquire ASG. In addition, the Company announced its intention to spin-off its 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, the shareholders will have received the $63.00 per share as well as the shares in the spin-off business, 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) adoption of the Merger Agreement and approval of the Merger Agreement by KLX’s stockholders; (ii) unless KLX has timely elected to sell ESG to a third party, the Exchange Act registration statement with respect to the KLX Energy Services shares to be issued in connection with the spin-off having been declared effective by the SEC and such shares having been approved for listing on Nasdaq and the period of time specified by applicable law for the mailing of an information statement in connection with the spin-off having expired (assuming the information statement in connection with the spin-off is mailed immediately after the Exchange Act registration statement is declared effective by the SEC, whether or not the information statement in connection with the spin-off has in fact been mailed), (iii) consummation of the ESG sale or spin-off, as applicable, and (iv) applicable regulatory approvals.

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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars In Millions, Except Per Share Data)

The following discussion and analysis addresses the results of our operations for the three months ended April 30, 2018 as compared to our results of operations for the three months ended April 30, 2017. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods.

On May 1, 2018, we announced that we entered an agreement with Boeing pursuant to which Boeing has agreed to acquire ASG, which is summarized in Note 14 to our condensed consolidated financial statements, and that we intend to spin-off our ESG business to our shareholders.  If the Merger is consummated, ASG will become a wholly-owned subsidiary of Boeing.

We believe, based on our experience in the industry, that we are a leading distributor and value‑added service provider of aerospace fasteners and consumables, and that we offer one of the broadest ranges of aerospace hardware, consumables and inventory management services worldwide. Founded in 1974 as M&M Aerospace Hardware, our Aerospace Solutions Group (“ASG”), formerly the consumables management segment of B/E Aerospace, has evolved into an industry leader through multiple acquisitions and strong organic growth. As of January 31, 2018, ASG’s global presence consisted of approximately 1.7 million square feet in 25 principal facilities with over 2,000 employees worldwide. We have substantially expanded the size, scope and nature of our business as a result of a number of acquisitions. B/E Aerospace acquired M&M in 2001. Between 2002 and 2017, we completed nine acquisitions. We believe our organic growth together with these acquisitions enabled us to position ourselves as a preferred global supplier to our customers. We believe we have become an industry leader providing aerospace fasteners, consumable products and supply chain management services. Through our global facilities network and advanced information technology systems, we believe we offer unparalleled service to commercial airlines, business jet and commercial aerospace and defense original equipment manufacturers (“OEMs”), maintenance, repair and overhaul (“MRO”) operators, and fixed base operators (“FBOs”). We have a large and diverse global customer base, including commercial aerospace manufacturers, commercial airlines, business jet and defense OEMs, OEM subcontractors and major MRO operators across five continents, and we provide access to over one million stock keeping units (“SKUs”). We serve as a distributor for every major aerospace fastener manufacturer. In order to support our vast range of custom products and services, we have invested over $100 in proprietary IT systems to create a superior technology platform. Our systems support both internal distribution processes and part attributes, along with customer services, including just-in-time (“JIT”) deliveries and kitting solutions. 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. In addition, through the acquisition of Herndon Aerospace & Defense LLC (“Herndon”) in May 2016, we expanded our capability to provide comprehensive supply chain management solutions to a broader portfolio of aftermarket customers. Herndon has established itself within the Department of Defense and its procurement arm, the Defense Logistics Agency, as a proven supplier of a broad range of consumables resulting in a number of long-term contracts with major military installations. We believe Herndon’s unique land-based military depot aftermarket product distribution platform will serve as an excellent new growth platform for ASG. The aforementioned operating business is operated within our ASG segment.

ASG also provides certain supply chain management services to certain of its customers. These services include the timely replenishment of products at the customer site, while also minimizing the customer’s on-hand inventory. These services are provided by ASG contemporaneously with the delivery of the product, and as such, once the product is delivered, ASG does not have a post-delivery obligation to provide services to the customer. The price of such services is generally included in the price of the products

delivered to the customer, and revenue is recognized upon delivery of the product, at which point, ASG has satisfied its obligations to the customer. We do not account for these services as a separate element, as the services do not have stand-alone value and cannot be separated from the product element of the arrangement.

In 2013, we initiated an expansion into the energy services sector. During 2013 and 2014, we acquired seven companies engaged in the business of providing technical services and associated equipment to oil and gas exploration and production companies. As a result, we now provide a broad range of solutions and equipment, which bring value‑added resources to a new customer base, often in remote locations. Our customers include independent and major oil and gas companies that are engaged in the exploration and production of oil and gas in North America, including in the Northeast region (the Marcellus and Utica Shales as well as the Mid-Continent Stack and SCOOP and Haynesville), Rocky Mountains region (the Williston, DJ, Uinta and Piceance Basins) and the Southwest region (including the Permian Basin and Eagle Ford). This business is operated within our Energy Services Group (“ESG”) segment.

Revenues by reportable segment for the three months ended April 30, 2018 and 2017, respectively, were as follows:

Revenues by geographic area (based on destination) for the three months ended April 30, 2018 and 2017, respectively, were as follows:

Revenues from our domestic and foreign operations for the three months ended April 30, 2018 and 2017, respectively, were as follows:

We are organized based on the products and services we offer. The Company’s reportable segments which are also its operating segments, are comprised of ASG and ESG. We determined that ASG and ESG met the requirements of a reportable segment each operating in a single line of business. Each segment regularly reports its results of operations and makes requests for capital expenditures and acquisition funding to the Company’s chief operational decision‑making group. Each operating segment has separate management teams and infrastructures dedicated to providing a full range of products and services to their customers.

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”), pursuant to which Boeing has agreed to acquire ASG and announced its intention to spin-off its ESG business (such business, after the completion of the spin-off, “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, the shareholders will have received the $63.00 per share as well as the shares in the spin-off business, 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) adoption of the Merger Agreement and approval of the Merger Agreement by KLX’s stockholders; (ii) unless KLX has timely elected to sell ESG to a third party, the Exchange Act registration statement with respect to the KLX Energy Services shares to be issued in connection with the spin-off having been declared effective by the SEC and such shares having been approved for listing on Nasdaq and the period of time specified by applicable law for the mailing of an information statement in connection with the spin-off having expired (assuming the information statement in connection with the spin-off is mailed immediately after the Exchange Act registration statement is declared effective by the SEC, whether or not the information statement in connection with the spin-off has in fact been mailed), (iii) consummation of the ESG sale or spin-off, as applicable, and (iv) applicable regulatory approvals.

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.

Current ESG Industry Conditions

Our business depends to a significant extent on the level of unconventional resource development activity and corresponding capital spending by oil and gas exploration and production companies onshore in North America. These activity and spending levels are strongly influenced by current and expected oil and natural gas prices. Oil and natural gas prices declined significantly between the third quarter of 2014 and the first quarter of 2016. However, oil and natural gas prices have since gradually increased. This price recovery has stimulated an increase in onshore North American completions activity, and if the current price environment holds or continues to improve, we expect a further increase in demand for our services.

The increase in high-intensity, high-efficiency completions of oil and gas wells further enhances the demand for our services. We compete with a limited number of service companies for the most complex and technically demanding wells in which we specialize, which are characterized by extended laterals, increased stage spacing and cluster spacing and high proppant loads. These well characteristics lead to increased operating leverage and returns for us, as we are able to complete more jobs and stages with the same number of units and crews. Service providers for these projects are selected based on their technical expertise and ability to execute safely and efficiently and, to a lesser extent, on price.

Within our industry, the technological advancements over the past approximately 30 years that allow for enhanced recovery from shale formations underlying much of the major onshore oil and gas reservoirs in the United States have dramatically expanded the market for services to support the drilling, completion and production of onshore oil and gas wells.  This has led to rapid growth in the market for the services we provide, culminating in record financial results for many oilfield 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 oilfield services that prevailed through all of 2015 and 2016, the oilfield 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.  In addition, we integrated the business’ reporting, control asset management, operations, sales and marketing and branding. As a result, we have created an integrated service provider of national scale, providing highly differentiated services, supported by an active research and development (“R&D”) effort integrated with our field personnel to provide real-time solutions to evolving customer requirements, positioning KLX Energy Services as 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, we experienced a 109.3% increase in revenues as compared with the prior year, and operating earnings turned positive during the fourth quarter of 2017. This turnaround in operating results continued in the first quarter of Fiscal 2018, as demonstrated by a 74.0% increase in revenues to $111.0, and a $16.6 increase in operating earnings to $6.5, inclusive of allocated costs associated with our strategic alternatives review and costs associated with the proposed spin-off of our ESG business.  Exclusive of these costs of approximately $3.8 in the first quarter of Fiscal 2018, our operating earnings would have been $10.3, or 9.3% of revenues. We believe our Fiscal 2017 and first quarter 2018 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.

RESULTS OF OPERATIONS

THREE MONTHS ENDED APRIL 30, 2018

COMPARED TO THREE MONTHS ENDED APRIL 30, 2017

($ in Millions, Except Per Share Data)

First quarter 2018 revenues increased 21.3% to $499.1 as compared with the same period of the prior year. Our consolidated revenue growth was driven by an 11.7% increase in ASG revenues and a 74.0% increase in ESG revenues.

First quarter 2018 cost of sales was $359.7, or 72.1% of sales, as compared to the prior year period of $298.4, or 72.6% of sales. The 50 basis point year-over-year improvement in cost of sales as a percentage of revenues is primarily due to substantially improved results at our ESG business due to the improved market conditions, and operating leverage, offset by a 180 basis point increase at ASG primarily due to acquisition integration costs and $2.6 of costs incurred during the first quarter of 2018 due to the transition to ASG’s new global distribution and operations center as compared to none in the prior year.

Selling, general and administrative (“SG&A”) expenses during the first quarter of 2018 were $78.2, or 15.7% of revenues, as compared with $64.3, or 15.6% of revenues, in the prior year period. SG&A as a percentage of revenues increased by 10 basis points as compared with the prior year period primarily due to $11.7 of costs incurred during the first quarter of 2018 due to the strategic alternatives review and the transition to ASG’s new global distribution and operations center.

Operating earnings and operating margin of $61.2 and 12.3% increased by approximately 25.9% and approximately 50 basis points, respectively, reflecting continued strong year-over-year improvement at ESG including $3.8 of costs related to the strategic alternatives review offset by a decline in operating margin at ASG. ASG operating earnings of $54.7 decreased 6.8% as compared to the prior year period primarily due to $10.5 of costs related to the strategic alternatives review and the transition to ASG’s new global distribution and operations center in the current year period.

Interest expense for the three months ended April 30, 2018 of $18.9 was flat as compared to the prior year period.

Income tax expense for the three months ended April 30, 2018 was $10.6, or 25.1% of earnings before income taxes, as compared with $11.2, or 37.8%, in the prior year period. The decrease in the effective tax rate was due to the recently implemented reduction to the corporate tax rate due to the recently enacted tax legislation.

Net earnings and net earnings per diluted share for the three months ended April 30, 2018 were $31.7 and $0.62, respectively, as compared to $18.4 and $0.36, respectively, in 2017. The changes in net earnings are due to the various factors discussed above. 

Segment Results

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

For the three months ended April 30, 2018, our ASG segment generated revenues of $388.1, an increase of approximately 11.7% compared to the same period in the prior year, driven by approximately 5.9% organic revenue growth. On a channel basis, aftermarket organic revenue growth of 6.6% was particularly strong, driven by a substantial increase in aircraft maintenance activity among MROs, repair shops and airlines in the Americas, Asia and Europe. Revenues from our OEM channel increased 5.4% on an organic basis driven by an increase in activity from commercial aerospace manufacturing customers and initial revenues from the ramp-up of new programs. ASG operating earnings of $54.7 decreased 6.8% as compared to the prior year period primarily due to $10.5 of costs related to the strategic alternatives review and the transition to ASG’s new global distribution and operations center in the current year period.

For the three months ended April 30, 2018, as compared to the same period of the prior year, ESG revenues of $111.0 reflected organic revenue growth of by 74.0%, and operating earnings increased $16.6 from a loss of $10.1 during the first quarter of last year to positive earnings of $6.5. Revenue growth and improvement in operating earnings were primarily due to improved market conditions, benefits from our integration initiatives and continued investment in differentiating technologies, personnel and innovative product and service lines.

LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

At April 30, 2018, we had $298.4 of cash and cash equivalents. Cash on hand at April 30, 2018 increased by $43.1 as compared with cash on hand at January 31, 2018 primarily as a result of cash flows from operating activities of $73.4 partially offset by capital expenditures of $27.0. Our liquidity requirements consist of working capital needs and ongoing capital expenditure requirements. Our primary requirements for working capital are directly related to the level of our operations. Our sources of liquidity consist of cash on hand, cash flow from operations and availability under our undrawn $750.0 Revolving Credit Facility. The substantial majority of our cash is held within the United States, and we believe substantially all of our foreign cash may be brought back into the United States in a tax efficient manner.

Working Capital

Working capital as of April 30, 2018 was $1,779.0, an increase of $35.5 as compared with working capital at January 31, 2018. As of April 30, 2018, total current assets increased by $78.4 and total current liabilities increased by $42.9 as compared with the prior fiscal year end amounts. Total current assets increased primarily as a result of increases in cash and accounts receivable of $43.1 and $39.7, respectively. The increase in total current liabilities was primarily due to a $31.5 increase in accounts payable.

Cash Flows

As of April 30, 2018, our cash and cash equivalents were $298.4 as compared to $255.3 at January 31, 2018. Cash generated from operating activities was $73.4 for the three months ended April 30, 2018 as

compared to $20.0 for the three months ended April 30, 2017, reflecting a $13.3 increase in net earnings, a $4.3 increase in inventories ($15.9 increase in the prior year), a $2.5 decrease in other assets ($8.3 increase in the prior year) and a $44.0 increase in accounts payable and accrued liabilities in the current period ($32.7 increase in the prior year). Cash used in investing activities was $27.0 for the three months ended April 30, 2018 as compared to $14.5 in the same period of the prior year primarily due to investments related to the Company’s new ASG global headquarters in the current year period and discrete investments in ESG capital equipment. Cash used in financing activities was $0.2 for the three months ended April 30, 2018 as compared to $14.5 in the prior year related to repurchases of our common stock.

Capital Spending

Our capital expenditures were $27.0 and $14.5 during the three months ended April 30, 2018 and 2017, respectively. We expect capital expenditures to be approximately $100.0 during 2018 reflecting significant investment related to the Company’s new ASG global headquarters and discrete investments within the ESG business. We expect to fund future capital expenditures from cash on hand, cash flows from operations and from funds available from our secured $750.0 Revolving Credit Facility, none of which was drawn at April 30, 2018.

Outstanding Debt and Other Financing Arrangements

Long-term debt at April 30, 2018 totaled $1,200.0 and consisted of our 5.875% senior unsecured notes (the “5.875% Notes”). On a net basis, after taking into consideration cash on hand and the debt issue costs for the 5.875% Notes, total debt was $886.8.

We also have a $750.0 Secured Revolving Credit Facility tied to a borrowing base formula, which bears interest at the London interbank offered rate (“LIBOR”) plus the applicable margin (as defined). No amounts were outstanding under this credit facility as of April 30, 2018. We believe that our cash flows, together with cash on hand and funds available under the credit facility will provide us with the ability to fund our operations, make planned capital expenditures payments and meet our debt service obligations for at least the next twelve months. 

Contractual Obligations

The following table reflects our contractual obligations and commercial commitments as of April 30, 2018. Commercial commitments include lines of credit, guarantees and other potential cash outflows resulting from a contingent event that requires performance by us or our subsidiaries pursuant to a funding commitment.