comparative period presented in the financial statements. The Company is currently evaluating the effect of this update on its consolidated financial statements.
In May 2014, FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which updated the guidance in ASC Topic 606,
Revenue Recognition
. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers
(Topic 606):
Deferral of the Effective Date
. The amendments in this update deferred the effective date for implementation of ASU 2014-09 by one year and is now effective for annual reporting periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. In April 2016, FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, and in May 2016, ASU 2016-12,
Revenues from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
both of which provide supplemental adoption guidance and clarification to ASU 2014-09. ASU 2016-10 and ASU 2016-12 must be adopted concurrently with the adoption of ASU 2014-09. The Company has not determined the impact this guidance will have on the financial statements. However, the identification of implementation project team members and the inventorying of contracts with customers, particularly large customer contracts, has begun. Other than increased disclosures, the impact of the revised accounting guidance to the results of operations and cash flows of the Company cannot be determined until the assessment process is complete.
Note 3.
Business Combinations
On May 17, 2016, the Company acquired Herndon Aerospace & Defense LLC (“Herndon”), an aftermarket aerospace supply chain management and consumables hardware distributor servicing principally aftermarket military depots as well as the commercial aerospace aftermarket, for an aggregate purchase price of $220.8 (net of cash acquired). During the quarter ended April 30, 2017, the Company finalized its valuation of inventory and intangible assets. The impact of the purchase price adjustments was not material to the Company’s financial statements.
Based on the Company’s final purchase price allocation, the excess of the purchase price of the fair value of the identifiable assets acquired approximated $119.6, of which $68.9 was allocated to identifiable intangible assets consisting of customer contracts and relationships and covenants not to compete and $50.7 is included in goodwill. The useful life assigned to the customer contracts and relationships is 20 years, and the covenants not to compete are being amortized over their contractual periods of five years.
The Herndon acquisition was accounted for as a purchase under FASB ASC 805,
Business Combinations
. The assets acquired and liabilities assumed have been reflected in the accompanying condensed consolidated balance sheet as of April 30, 2017, and the results of operations are included in the accompanying condensed consolidated statements of earnings and comprehensive income from the date of acquisition.
The following table summarizes the final estimates of fair values of assets acquired and liabilities assumed in the Herndon acquisition in accordance with ASC 805, which are recorded based on management’s estimates as follows:
|
|
|
|
|
Accounts receivable-trade
|
|
$
|
12.3
|
|
Inventories
|
|
|
103.8
|
|
Other current and non-current assets
|
|
|
3.7
|
|
Property and equipment
|
|
|
2.1
|
|
Goodwill
|
|
|
50.7
|
|
Identified intangibles
|
|
|
68.9
|
|
Accounts payable
|
|
|
(9.7)
|
|
Other current and non-current liabilities
|
|
|
(11.0)
|
|
Total consideration paid
|
|
$
|
220.8
|
|
The majority of goodwill and intangible assets are expected to be deductible for tax purposes.
On a pro forma basis to give effect to the Herndon acquisition as if it occurred on February 1, 2016, revenues, net earnings and earnings per diluted share for the three months ended April 30, 2016 were $397.0, $5.6 and $0.11, respectively.
The Company has substantially integrated Herndon into its Aerospace Solutions Group (“ASG”) segment systems. As a result, it is not practicable to report stand-alone revenues or operating earnings of the acquired business since the acquisition date.
Note 4.
Inventories
Inventories, made up of finished goods, consist primarily of aerospace fasteners and consumables. The Company values inventories at the lower of cost or market, using first‑in, first‑out or weighted average cost method. The Company reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical demand, estimated product demand to support contractual supply agreements with its customers and the age of the inventory, among other factors. Demand for the Company’s products can fluctuate from period to period depending on customer activity.
In accordance with industry practice, inventories include amounts relating to long-term contracts with long production cycles, some of which are not expected to be realized within one year. In addition, the Company supports a substantial portion of the global fleet of aircraft in service, and in its capacity as a stocking distributor will acquire and hold inventories for aircraft maintenance at periodic intervals as mandated by the Federal Aviation Administration (“FAA”) or similar regulatory agencies. Based on historical experience, the support of the aftermarket activities with products such as those which the Company sells will necessitate holding inventory in excess of the amount required to support new build production activity contracts. Obsolescence has historically been immaterial for the Company due to the long life of an aircraft and nature of the products sold by the Company. Inventory with a limited shelf life is continually monitored and reserved for in advance of expiration. The annual provision for inventory with limited shelf life has historically been immaterial. Reserves for excess and obsolete inventory were approximately $60.3
and $56.4 as of April 30, 2017 and January 31, 2017, respectively.
Note 5.
Goodwill and Intangible Assets
The table below sets forth the intangible assets by major asset class, all of which were acquired through business purchase transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2017
|
|
|
|
Useful Life
|
|
Original
|
|
Accumulated
|
|
Net Book
|
|
|
|
(Years)
|
|
Cost
|
|
Amortization
|
|
Value
|
|
Customer contracts and relationships
|
|
8
|
-
|
30
|
|
$
|
422.7
|
|
$
|
134.1
|
|
$
|
288.6
|
|
Covenants not to compete
|
|
5
|
|
|
5.5
|
|
|
3.7
|
|
|
1.8
|
|
Developed technologies
|
|
15
|
|
|
3.3
|
|
|
0.3
|
|
|
3.0
|
|
Trade names
|
|
Indefinite
|
|
|
17.1
|
|
|
-
|
|
|
17.1
|
|
|
|
|
|
|
|
$
|
448.6
|
|
$
|
138.1
|
|
$
|
310.5
|
|
Amortization expense associated with identifiable intangible assets was approximately $4.8 and $4.7 for the three months ended April 30, 2017 and 2016, respectively. The Company currently expects to recognize amortization expense of approximately $20.0 in each of the next five fiscal years (primarily related to our ASG business). The future amortization amounts are estimates. Actual future amortization expense may be different due to finalization of purchase price allocations of acquisitions, future acquisitions, impairments, changes in amortization periods or other factors such as changes in exchange rates for assets acquired outside the United States. The Company expenses costs to renew or extend the term of a recognized intangible asset. Goodwill increased by $3.5 as compared to January 31, 2017 primarily as a result of foreign currency translation adjustments.
Note 6.
Related Party Transactions
On December 17, 2014, B/E Aerospace, Inc. (“B/E Aerospace”) created an independent public company through a spin-off of its ASG and Energy Services Group (“ESG”) businesses to B/E Aerospace’s stockholders (“Spin-Off”). Following the Spin-Off, the Company created in-house substantially all of the functions that were previously provided to it by B/E Aerospace. The Company entered into certain agreements with B/E Aerospace related to transition services and IT services through April 2017. In addition, the Company entered into an employee matters agreement and a tax sharing and indemnification agreement with B/E Aerospace in connection with the Spin-Off. Expenses incurred under those agreements were not material for the three months ended April 30, 2017 and were $2.7 for the three months ended April 30, 2016.
On April 13, 2017, B/E Aerospace was sold to Rockwell Collins, Inc. and is no longer a related party. Sales to B/E Aerospace were $4.4 and $5.7 through April 12, 2017 and for the three months ended April 30, 2016, respectively.
Note 7.
Accrued Liabilities
Accrued liabilities consisted of the following
:
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
January 31,
|
|
|
|
2017
|
|
2017
|
|
Accrued salaries, vacation and related benefits
|
|
$
|
28.5
|
|
$
|
31.6
|
|
Accrued commissions
|
|
|
6.2
|
|
|
8.7
|
|
Income taxes payable
|
|
|
11.6
|
|
|
10.3
|
|
Accrued interest
|
|
|
29.4
|
|
|
11.7
|
|
Other accrued liabilities
|
|
|
30.4
|
|
|
28.8
|
|
|
|
$
|
106.1
|
|
$
|
91.1
|
|
Note 8.
Long-Term Debt
As of April 30, 2017, long-term debt consisted of $1,200.0 aggregate principal amount of the Company’s 5.875% senior unsecured notes due 2022 (the “5.875% Notes”). On a net basis, after taking into consideration the debt issue costs for the Term Loan Facility, total debt was $1,182.6. As of April 30, 2017, the Company also had a $750.0 undrawn secured revolving credit facility pursuant to a credit agreement dated as of December 16, 2014 and amended and restated on May 19, 2015 (the “Revolving Credit Facility”).
Borrowings under the Revolving Credit Facility bear interest at an annual rate equal to the London interbank offered rate (“LIBOR”) (as defined in the Revolving Credit Facility) plus the applicable margin (as defined). No amounts were outstanding under the Revolving Credit Facility as of April 30, 2017 or January 31, 2017.
The Revolving Credit Facility is tied to a borrowing base formula and has no maintenance financial covenants. This Revolving Credit Facility matures in May 2020. The credit agreement is collateralized by the Company’s assets and contains customary affirmative covenants, negative covenants, restrictions on the
payment of dividends and the repurchase of our stock, and conditions precedent for borrowings, all of which were met as of April 30, 2017.
Letters of credit issued under the Revolving Credit Facility aggregated $5.6 and $5.5 at April 30, 2017 and January 31, 2017, respectively.
Note 9.
Fair Value Measurements
All short-term financial instruments are generally carried at amounts that approximate estimated fair value. The fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. Assets measured at fair value are categorized based upon the lowest level of significant input to the valuations.
Level 1 – quoted prices in active markets for identical assets and liabilities.
Level 2 – quoted prices for identical assets and liabilities in markets that are not active, or observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.
The carrying amounts of cash and cash equivalents (which the Company classifies as Level 1 assets), accounts receivable – trade and accounts payable represent their respective fair values due to their short-term nature. There was no debt outstanding under the Revolving Credit Facility as of April 30, 2017. The fair value of the Company’s 5.875% Notes, based on market prices for publicly-traded debt (which the Company classifies as Level 2 inputs), was $1,260.0 and $1,260.7 as of April 30, 2017 and January 31, 2017, respectively.
Note 10.
Commitments, Contingencies and Off-Balance Sheet Arrangements
Lease Commitments
- The Company finances its use of certain facilities and equipment under committed lease arrangements provided by various institutions. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on the condensed consolidated balance sheets. At April 30, 2017, future minimum lease payments under these arrangements approximated $110.7, the majority of which related to long-term real estate leases.
Litigation
- The Company is a defendant in various legal actions arising in the normal course of business, the outcomes of which, in the opinion of management, neither individually nor in the aggregate are likely to result in a material adverse effect on the Company’s consolidated financial statements.
Indemnities, Commitments and Guarantees
- During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to other parties to certain acquisition agreements. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. Many of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments the Company could be obligated to make. However, the Company is unable to estimate the maximum amount of liability related to its indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events that are not reasonably determinable. Management believes that any liability for these indemnities, commitments and guarantees would not be material to the accompanying consolidated financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.
The Company has employment agreements with certain key members of management with three year initial terms and which renew for one additional year on each anniversary date. The Company’s employment agreements generally provide for certain protections in the event of a change of control. These protections generally include the payment of severance and related benefits under certain circumstances in the event of a change of control.
Note 11.
Accounting for Stock-Based Compensation
The Company has a Long-Term Incentive Plan (“LTIP”) under which the Company’s Compensation Committee has the authority to grant stock options, stock appreciation rights, restricted stock, restricted stock units or other forms of equity-based or equity-related awards.
The Company accounts for share-based compensation arrangements in accordance with the provisions of FASB ASC 718,
Compensation—Stock Compensation
, whereby share-based compensation cost is measured on the date of grant, based on the fair value of the award, and is recognized over the requisite service period.
Compensation cost recognized during the three months ended April 30, 2017 and 2016 related to KLX restricted stock and stock options was $5.7 and $4.6, respectively. Unrecognized compensation expense related to these grants was $35.3 at April 30, 2017.
KLX has established a qualified Employee Stock Purchase Plan, the terms of which allow for qualified employees (as defined in the Plan) to participate in the purchase of designated shares of KLX’s common stock at a price equal to 85% of the closing price on the last business day of each 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 recognized during the three months ended April 30, 2017 and 2016 for this plan was $0.1 and $0.1, respectively.
Note 12.
Segment Reporting
The Company is organized based on the products and services it offers. The Company’s reportable segments which are also its operating segments, are comprised of ASG and ESG. The segments regularly report their results of operations and make requests for capital expenditures and acquisition funding to the Company’s chief operational decision-making group (“CODM”). This group is comprised of the Chairman and Chief Executive Officer and the President and Chief Operating Officer. As a result, the CODM has determined the Company has two reportable segments.
The following table presents revenues and operating earnings (losses) by reportable segment:
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED
|
|
|
|
April 30,
|
|
April 30,
|
|
Revenues
|
|
2017
|
|
2016
|
|
Aerospace Solutions Group
|
|
$
|
347.5
|
|
$
|
315.8
|
|
Energy Services Group
|
|
|
63.8
|
|
|
37.0
|
|
Total revenues
|
|
|
411.3
|
|
|
352.8
|
|
Operating earnings (loss)
(1)
|
|
|
|
|
|
|
|
Aerospace Solutions Group
|
|
|
58.7
|
|
|
54.1
|
|
Energy Services Group
|
|
|
(10.1)
|
|
|
(30.9)
|
|
Total operating earnings
|
|
|
48.6
|
|
|
23.2
|
|
Interest expense
|
|
|
19.0
|
|
|
18.9
|
|
Earnings before income taxes
|
|
$
|
29.6
|
|
$
|
4.3
|
|
|
(1)
|
|
Operating earnings (loss) include an allocation of employee benefits and general and administrative costs primarily based on the proportion of each segment’s number of employees for the three months ended April 30, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED
|
|
|
|
As Reported
|
|
As Restated
|
|
|
|
April 30,
|
|
April 30,
|
|
|
|
2016
|
|
2016
|
|
Accounts receivable - trade
|
|
$
|
267.8
|
|
$
|
252.4
|
|
Inventories, net
|
|
|
1,284.0
|
|
|
1,293.5
|
|
Total stockholders' equity
|
|
|
2,234.0
|
|
|
2,230.4
|
|
Total revenues
|
|
|
368.2
|
|
|
352.8
|
|
Total cost of sales
|
|
|
278.7
|
|
|
269.3
|
|
Income tax expense
|
|
|
4.0
|
|
|
1.8
|
|
Net earnings
|
|
|
6.2
|
|
|
2.5
|
|
Net earnings per share - basic
|
|
|
0.12
|
|
|
0.05
|
|
Net earnings per share - diluted
|
|
|
0.12
|
|
|
0.05
|
|
The Statement of Cash Flows was restated to reflect the impact of these errors. In addition, the Company separately disclosed the provision for inventory write-downs in the Statement of Cash Flows which was previously included in the change in inventory line item. There were no changes in total operating, investing, or financing cash flows. The restated results for the three months ended April 30, 2016 include the correction of amounts relating to prior periods, which correction resulted in a reduction of revenue, cost of sales, and net earnings of $12.1, $6.6 and $3.4, respectively. The impact of these prior period errors was not material to the year ended January 31, 2017 or to any prior periods.
Note 13.
Net Earnings Per Common Share
Basic net earnings per common share is computed using the weighted average common shares outstanding during the period. Diluted net earnings per common share is computed by using the weighted average common shares outstanding including the dilutive effect of stock options, shares issued under the KLX LTIP and restricted shares based on an average share price during the period. For the three months ended April 30, 2017 and 2016, approximately no shares and 0.2 shares of the Company’s common stock, respectively, were excluded from the determination of diluted earnings per common share because their effect would have been anti-dilutive. The computations of basic and diluted earnings per share for the three months ended April 30, 2017 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED
|
|
|
|
April 30,
|
|
April 30,
|
|
|
|
2017
|
|
2016
|
|
Net earnings
|
|
$
|
18.4
|
|
$
|
2.5
|
|
(Shares in millions)
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
51.1
|
|
|
52.0
|
|
Effect of dilutive securities - dilutive securities
|
|
|
0.7
|
|
|
0.2
|
|
Diluted weighted average common shares
|
|
|
51.8
|
|
|
52.2
|
|
|
|
|
|
|
|
|
|
Basic net earnings per common share
|
|
$
|
0.36
|
|
$
|
0.05
|
|
Diluted net earnings per common share
|
|
$
|
0.36
|
|
$
|
0.05
|
|
Note 14.
Income Taxes
In accordance with FASB ASC 740,
Income Taxes
, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. As of April 30, 2017 and 2016, the Company had $8.5 and $12.5, respectively, of uncertain tax positions, including accrued interest of $1.2 and $1.5 at April 30, 2017 and 2016, respectively, all of which would affect the Company’s effective tax rate if recognized.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
S
(In Millions, Except Per Share Data)
The following discussion and analysis addresses the results of our operations for the three months ended April 30, 2017 as compared to our results of operations for the three months ended April 30, 2016. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods.
As discussed in Note 15. Selected Quarterly Data (Unaudited) to our consolidated and combined financial statements contained in the 2016 Form 10-K, during our Fiscal 2016 preparation of the annual 10-K, the Company restated its April 30, 2016 interim financial statements to reflect the correction of errors that were identified. The Company concluded the corrected errors were immaterial individually and in the aggregate, and the Company’s Condensed Consolidated Balance Sheet, Statement of Earnings and Comprehensive Income and Statement of Cash Flows reflect the correction of errors for the prior three-month period ended April 30, 2016.
We believe, based on our experience in the industry, that we are a leading distributor and value‑added service provider of aerospace fasteners and consumables, and that we offer one of the broadest ranges of aerospace hardware, consumables and inventory management services worldwide. Founded in 1974 as M&M Aerospace Hardware, our Aerospace Solutions Group (“ASG”), formerly the consumables management segment of B/E Aerospace, has evolved into an industry leader through multiple acquisitions and strong organic growth. As of January 31, 2017, ASG’s global presence consisted of approximately 1.5 million square feet in 18 principal facilities with approximately 2,000 employees worldwide. We have substantially expanded the size, scope and nature of our business as a result of a number of acquisitions. B/E Aerospace acquired M&M in 2001. Between 2002 and 2016, we completed seven acquisitions, for an aggregate purchase price of approximately $2.1 billion. We believe our organic growth together with these acquisitions enabled us to position ourselves as a preferred global supplier to our customers. We believe we have become an industry leader providing aerospace fasteners, consumable products and supply chain management services. Through our global facilities network and advanced information technology systems, we believe we offer unparalleled service to commercial airlines, business jet and defense original equipment manufacturers (“OEMs”), maintenance, repair and overhaul (“MRO”) operators, and fixed base operators (“FBOs”). We have a large and diverse global customer base, including commercial airlines, business jet and defense OEMs, OEM subcontractors and major MRO operators across five continents, and we provide access to over one million stock keeping units (“SKUs”). We serve as a distributor for every major aerospace fastener manufacturer. In order to support our vast range of custom products and services, we have invested over $100 in proprietary IT systems to create a superior technology platform. Our systems support both internal distribution processes and part attributes, along with customer services, including just-in-time (“JIT”) deliveries and kitting solutions. In addition, through the acquisition of Herndon Aerospace & Defense LLC (“Herndon”) in May 2016, we expanded our capability to provide comprehensive supply chain management solutions to a broader portfolio of aftermarket customers. Herndon has established itself within the Department of Defense and its procurement arm, the Defense Logistics Agency, as a proven supplier of a broad range of consumables resulting in a number of long-term contracts with major military installations. We believe Herndon’s unique land-based military depot aftermarket product distribution platform will serve as an excellent new growth platform for ASG. The aforementioned operating business is operated within our ASG segment.
ASG also provides certain supply chain management services to certain of its customers. These services include the timely replenishment of products at the customer site, while also minimizing the customer’s on-hand inventory. These services are provided by ASG contemporaneously with the delivery of the product, and as such, once the product is delivered, ASG does not have a post-delivery obligation to provide services to the customer. The price of such services is generally included in the price of the products delivered to the customer, and revenue is recognized upon delivery of the product, at which point, ASG has satisfied its obligations to the customer. We do not account for these services as a separate element, as the
services do not have stand-alone value and cannot be separated from the product element of the arrangement.
In 2013, we initiated an expansion into the energy services sector. During 2013 and 2014, we acquired seven companies engaged in the business of providing technical services and related rental equipment to oil and gas exploration and production companies. As a result, we now provide a broad range of solutions and equipment, which bring value‑added resources to a new customer base, often in remote locations. Our customers include independent and major oil and gas companies that are engaged in the exploration and production of oil and gas in North America, including in the Northeast (Marcellus and Utica Shales), Rocky Mountains (Williston and Piceance Basins), Southwest (Permian Basin and Eagle Ford Shale) and Mid‑Continent. This business is operated within our Energy Services Group (“ESG”) segment.
Revenues by reportable segment for the three months ended April 30, 2017 and 2016, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED
|
|
|
|
|
April 30, 2017
|
|
|
April 30, 2016
|
|
|
|
|
Revenues
|
|
%
|
|
|
Revenues
|
|
%
|
|
|
Aerospace Solutions Group
|
|
$
|
347.5
|
|
84.5
|
%
|
|
$
|
315.8
|
|
89.5
|
%
|
|
Energy Services Group
|
|
|
63.8
|
|
15.5
|
%
|
|
|
37.0
|
|
10.5
|
%
|
|
Total revenues
|
|
$
|
411.3
|
|
100.0
|
%
|
|
$
|
352.8
|
|
100.0
|
%
|
|
Revenues by geographic area (based on destination) for the three months ended April 30, 2017 and 2016, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED
|
|
|
|
|
April 30, 2017
|
|
|
April 30, 2016
|
|
|
|
|
Revenues
|
|
%
|
|
|
Revenues
|
|
%
|
|
|
United States
|
|
$
|
250.5
|
|
60.9
|
%
|
|
$
|
195.7
|
|
55.5
|
%
|
|
Europe
|
|
|
97.2
|
|
23.6
|
%
|
|
|
99.4
|
|
28.2
|
%
|
|
Asia, Pacific Rim, Middle East and other
|
|
|
63.6
|
|
15.5
|
%
|
|
|
57.7
|
|
16.3
|
%
|
|
Total revenues
|
|
$
|
411.3
|
|
100.0
|
%
|
|
$
|
352.8
|
|
100.0
|
%
|
|
Revenues from our domestic and foreign operations for the three months ended April 30, 2017 and 2016, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
April 30,
|
|
|
|
2017
|
|
2016
|
|
Domestic
|
|
$
|
409.8
|
|
$
|
327.0
|
|
Foreign
|
|
|
1.5
|
|
|
25.8
|
|
Total revenues
|
|
$
|
411.3
|
|
$
|
352.8
|
|
We are organized based on the products and services we offer. The Company’s reportable segments which are also its operating segments, are comprised of ASG and ESG. We determined that ASG and ESG met the requirements of a reportable segment each operating in a single line of business. Each segment regularly reports its results of operations and makes requests for capital expenditures and acquisition funding to the Company’s chief operational decision‑making group. Each operating segment has separate management teams and infrastructures dedicated to providing a full range of products and services to their customers.
Current ESG Industry Conditions
Over the past several years, the price of crude oil declined from over $100.00 per barrel in 2014 to approximately $50.00 at April 30, 2017, and as a result, over this period, oil field service companies that provide services similar to ESG have all suffered significant reductions in demand and pricing from their oil exploration and production customers. This severe change in industry conditions resulted in a reduction of almost 800 oil rigs, a loss of almost 200,000 U.S. jobs throughout the energy sector and a corresponding decrease in demand and pricing for oil field services as the exploration and production (“E&P”) companies cut back their spending for new exploration.
We implemented a business alignment and cost reduction initiative in 2015 to size our operations to current demand levels. We began to see a stabilization in demand in late 2016, and during the first quarter of Fiscal 2017, ESG experienced a 72.4% increase in revenues versus the same period in the prior year, and an increase of 46.3% as compared to the fourth quarter of Fiscal 2016. We believe ESG’s first quarter performance reflects our business realignment and cost reduction initiatives as well as the improvement in industry conditions. We are continuing to carefully manage our costs, while continuing to invest in differentiating technologies, personnel and innovative product and service lines, as we build an industry leading platform in the services niche in which we operate.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2017
COMPARED TO THREE MONTHS ENDED APRIL 30, 2016
($ in Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
THREE MONTHS ENDED
|
|
Percent
|
|
|
|
|
April 30, 2017
|
|
April 30, 2016
|
|
Change
|
|
|
Aerospace Solutions Group
|
|
$
|
347.5
|
|
$
|
315.8
|
|
10.0
|
%
|
|
Energy Services Group
|
|
|
63.8
|
|
|
37.0
|
|
72.4
|
%
|
|
Total revenues
|
|
$
|
411.3
|
|
$
|
352.8
|
|
16.6
|
%
|
|
First quarter 2017 revenues of $411.3 increased 16.6% as compared with the prior year. Our consolidated revenue growth was driven by a 10.0% increase in ASG revenues and a 72.4% increase in ESG revenues.
First quarter 2017 cost of sales was $298.4, or 72.6% of sales, as compared to the prior year period of $269.3, or 76.3% of sales. The year-over-year improvement in cost of sales as a percentage of revenues is primarily due to substantially improved results at our ESG business due to improved industry conditions and the benefits from our ESG cost reduction initiatives.
Selling, general and administrative (“SG&A”) expense during the first quarter of 2017 was $64.3, or 15.6% of revenues, as compared with $60.3, or 17.1% of revenues, in the prior year period. SG&A, as a percentage of revenues, decreased as compared with the prior year period by 150 basis points primarily due to increased operating leverage at ESG, which grew revenues by 72.4% while SG&A only increased 2.7%.
Operating earnings of $48.6 increased $25.4, or 109.5%. Operating margin improved 520 basis points to 11.8% driven by improved performance by our ESG business slightly offset by the impact of lower margins at ASG resulting from the inclusion of lower margin Herndon results for the first quarter of 2017.
Interest expense for the three months ended April 30, 2017 was $19.0 as compared to $18.9 in the prior year period.
Income tax expense for the three months ended April 30, 2017 was $11.2, or 37.8% of earnings before income taxes, as compared with an income tax expense of $1.8 in the prior year period.
Net earnings and net earnings per share for the three months ended April 30, 2017 were $18.4 and $0.36, respectively, as compared to $2.5 and $0.05, respectively, in 2016. The changes in net earnings are due to the various factors discussed above.
Segment Results
The following is a summary of operating earnings (loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED
|
|
Percent
|
|
|
|
|
April 30, 2017
|
|
April 30, 2016
|
|
Change
|
|
|
Aerospace Solutions Group
|
|
$
|
58.7
|
|
$
|
54.1
|
|
8.5
|
%
|
|
Energy Services Group
|
|
|
(10.1)
|
|
|
(30.9)
|
|
67.3
|
%
|
|
Total operating earnings
|
|
$
|
48.6
|
|
$
|
23.2
|
|
109.5
|
%
|
|
For the three months ended April 30, 2017, ASG revenues of $347.5 increased 10.0% compared to the same period in the prior year. Revenue growth was driven primarily by an increase in military aftermarket
demand. ASG operating earnings of $58.7 were up 8.5% as compared to the same period in the prior year. ASG operating margin of 16.9% declined 20 basis points reflecting the lower, but improving, margins associated with the Herndon business along with integration related expenses.
For the three months ended April 30, 2017, ESG revenues of $63.8 increased by 72.4%, as compared to the prior year, and operating loss decreased $20.8, or 67.3%, to $(10.1). On a sequential quarterly basis, revenues increased by 46.3%, and operating loss decreased by 46.8%.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
Cash on hand at April 30, 2017 decreased by $8.2 as compared with cash on hand at January 31, 2017 primarily as a result of capital expenditures of $14.5 and the Company’s repurchase of $14.5 of KLX common shares, partially offset by cash flows from operating activities of $20.0. 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 $750.0 Revolving Credit Facility. At April 30, 2017, we had $269.1 of cash and cash equivalents. 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, 2017 was $1,724.4, an increase of $21.9, as compared with working capital at January 31, 2017. As of April 30, 2017, total current assets increased by $53.1 and total current liabilities increased by $31.2 as compared with the prior fiscal year end amounts. Total current assets increased primarily as a result of a $45.3 increase in accounts receivable and an $11.3 increase in inventories offset by an $8.2 decrease in cash and cash equivalents. The increase in total current liabilities was due to a $16.2 increase in accounts payable and a $15.0 increase in accrued liabilities (principally accrued interest).
Cash Flows
As of April 30, 2017, our cash and cash equivalents were $269.1 as compared to $277.3 at January 31, 2017. Cash generated from operating activities was $20.0 for the three months ended April 30, 2017 as compared to $41.4 for the three months ended April 30, 2016, primarily reflecting a $43.0 increase in accounts receivable, reflecting the 10.0% increase in ASG revenues and 72.4% increase in ESG revenues, as compared with an $8.8 decrease in the prior year, and a $15.9 increase in inventories compared to a $3.4 increase in the prior year. The decrease was partially offset by a $32.7 increase in accounts payable and accrued liabilities in 2017 compared with a $1.6 decrease in the prior year.
Capital Spending
Our capital expenditures were $14.5 and $19.2 during the three months ended April 30, 2017 and 2016, respectively. We expect capital expenditures to be approximately $75.0 during 2017 related to the build-out of ASG’s new global warehouse and segment headquarters and for general business purposes. We expect to fund future capital expenditures from cash on hand, cash flow from operations and from funds available from our secured $750.0 Revolving Credit Facility, none of which was drawn at April 30, 2017.
Outstanding Debt and Other Financing Arrangements
Long-term debt at April 30, 2017 totaled $1,200.0 and consisted of our 5.875% senior unsecured notes. On a net basis, after taking into consideration the debt issue costs for the Term Loan Facility, total debt was $1,182.6.
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, 2017. 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, 2017. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
|
Long-term debt and other non-current liabilities
(1)
|
|
$
|
0.8
|
|
$
|
0.8
|
|
$
|
0.8
|
|
$
|
0.9
|
|
$
|
1.1
|
|
$
|
1,222.4
|
|
$
|
1,226.8
|
|
Operating leases
|
|
|
19.1
|
|
|
23.0
|
|
|
19.9
|
|
|
17.0
|
|
|
13.4
|
|
|
18.3
|
|
|
110.7
|
|
Future interest payments on outstanding debt
(2)
|
|
|
72.1
|
|
|
72.6
|
|
|
72.6
|
|
|
72.6
|
|
|
72.6
|
|
|
213.9
|
|
|
576.4
|
|
Total
|
|
$
|
92.0
|
|
$
|
96.4
|
|
$
|
93.3
|
|
$
|
90.5
|
|
$
|
87.1
|
|
$
|
1,454.6
|
|
$
|
1,913.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit
|
|
$
|
5.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
$
|
5.6
|
|
|
(1)
|
|
Our liability for unrecognized tax benefits of $8.5, including related interest and penalties at April 30, 2017, has been omitted from the above table because we cannot determine with certainty when this liability will be settled. It is reasonably possible that the amount of liability for unrecognized tax benefits will change in the next twelve months; however, we do not expect the change to have a material impact on our consolidated financial statements.
|
|
(2)
|
|
Interest payments include interest payments due on the 5.875% senior unsecured notes based on the stated rate of 5.875%. To the extent we incur interest on the Revolving Credit Facility, interest payments would fluctuate based on LIBOR or the prime rate pursuant to the terms of the Revolving Credit Facility.
|
We believe that our cash flows, together with cash on hand and the availability under the Revolving Credit Facility, provide us with the ability to fund our operations, make planned capital expenditures and make scheduled debt service payments for at least the next twelve months. However, such cash flows are dependent upon our future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors, including the conditions of our markets, some of which are beyond our control. If, in the future, we cannot generate sufficient cash from operations to meet our debt service obligations, we will need to refinance such debt obligations, obtain additional financing or sell assets. We cannot assure you that our business will generate cash from operations or that we will be able to obtain financing from other sources sufficient to satisfy our debt service or other requirements.
Off-Balance Sheet Arrangements
Lease Arrangements
We finance our use of certain equipment under committed lease arrangements provided by various financial 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 in our condensed
consolidated balance sheets. Our aggregate future minimum lease payments under these arrangements totaled approximately $110.7 at April 30, 2017.
Indemnities, Commitments and Guarantees
During the normal course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include indemnities to our customers in connection with the sale and delivery of our products, 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. We believe that many of our indemnities, commitments and guarantees provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events which are not reasonably determinable. Management believes that any liability for these indemnities, commitments and guarantees would not be material to our condensed consolidated financial statements.
Backlog
We believe that backlog is not a relevant measure for our ASG segment, given the long-term nature of our contracts with our customers. Few, if any, include minimum purchase requirements, annually or over the term of the agreement. Our ESG segment operates under Master Service Agreements (“MSAs”) with our oil and gas customers, which set forth the terms and conditions for the provision of services and the rental of equipment. Rental tool and service contracts are typically based on a day rate with rates based on the type of equipment and competitive conditions. As a result, we do not record backlog.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2016 Form 10-K. There have been no changes to our critical accounting policies since January 31, 2017.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information to investors. This Quarterly Report on Form 10-Q (this “Form 10-Q”) includes forward-looking statements that reflect our current expectations and projections about our future results, performance and prospects. Forward-looking statements include all statements that are not historical in nature or are not current facts. We have tried to identify these forward-looking statements by using forward-looking words including "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "continue," "may," "might," "should," "could," "will" or the negative of these terms or similar expressions.
These forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause our actual results, performance and prospects to differ materially from those expressed in, or implied by, these forward-looking statements. Factors that might cause such a difference include those discussed in our filings with the SEC, in particular those discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017, including the following factors:
|
·
|
|
regulation of and dependence upon the aerospace and energy industries;
|
|
·
|
|
the cyclical nature of the aerospace and energy industries and the deterioration of general economic conditions;
|
|
·
|
|
market prices for fuel, oil and natural gas;
|
|
·
|
|
competitive conditions;
|
|
·
|
|
legislative or regulatory changes and potential liability under federal and state laws and regulations;
|
|
·
|
|
risks inherent in international operations, including compliance with anti-corruption laws and regulations of the U.S. government and various international jurisdictions;
|
|
·
|
|
doing business with the U.S. government;
|
|
·
|
|
reduction in government military spending;
|
|
·
|
|
JIT contracts and LTAs having no guarantee of future customer purchase requirements;
|
|
·
|
|
dependence on suppliers and on third-party package delivery companies;
|
|
·
|
|
decreases in the rate at which oil or natural gas reserves are discovered or developed;
|
|
·
|
|
impact of technological advances on the demand for our products and services;
|
|
·
|
|
delays of customers obtaining permits for their operations;
|
|
·
|
|
hazards and operational risks that may not be fully covered by insurance;
|
|
·
|
|
the write-off of a significant portion of intangible assets;
|
|
·
|
|
the need to obtain additional capital or financing, and the cost of obtaining such capital or financing;
|
|
·
|
|
limitations that our organizational documents, debt instruments and U.S. federal income tax requirements may have on our financial flexibility or our ability to engage in strategic transactions;
|
|
·
|
|
failure to have the Spin-Off qualified as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended, or our inability to achieve some or all of the benefits of the Spin-Off;
|
|
·
|
|
changes in supply and demand of equipment;
|
|
·
|
|
oilfield anti-indemnity provisions;
|
|
·
|
|
reliance on information technology resources and the inability to implement new technology;
|
|
·
|
|
increased labor costs or the unavailability of skilled workers;
|
|
·
|
|
inability to manage inventory; and
|
|
·
|
|
inability to successfully consummate acquisitions or integrate acquisitions after closing or inability to manage potential growth.
|
In light of these risks and uncertainties, you are cautioned not to put undue reliance on any forward-looking statements in this Form 10-Q. These statements should be considered only after carefully reading this entire Form 10-Q. Except as required under the federal securities laws and rules and regulations of the SEC, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward-looking events discussed in this Form 10-Q not to occur.
ITEM 3
. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RIS
K
We are exposed to a variety of risks, including foreign currency fluctuations and changes in interest rates affecting the cost of our variable-rate debt.
Foreign Currency
– We have direct operations in Europe that receive revenues from customers primarily in U.S. dollars and we purchase component parts from foreign vendors primarily in British pounds or Euros. Accordingly, we are exposed to transaction gains and losses that could result from changes in foreign currency exchange rates relative to the U.S. dollar. Our largest foreign currency exposure results from activity in British pounds and Euros.
From time to time, we and our foreign subsidiaries may enter into foreign currency exchange contracts to manage risk on transactions conducted in foreign currencies. At April 30, 2017, we had no outstanding forward currency exchange contracts. In addition, we have not entered into any other derivative financial instruments.
Interest Rates
– As of April 30, 2017, we have no adjustable rate debt outstanding. We do not engage in transactions intended to hedge our exposure to changes in interest rates.
As of April 30, 2017, we maintained a portfolio of cash and securities consisting mainly of taxable, interest-bearing deposits with weighted average maturities of less than three months. If short-term interest rates were to increase or decrease by 10%, we estimate interest income would increase or decrease by approximately $0.1.
ITEM 4
. CONTROLS AND PROCEDURE
S
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, of the effectiveness, as of April 30, 2017, of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that due to the material weakness in internal control over financial reporting described in our Form 10-K, our disclosure controls and procedures were not effective as of April 30, 2017.
Internal Control Over Financial Reporting
The Company created a data center substantially similar to the data center maintained by B/E Aerospace under a transition services agreement (“TSA”) through April 2017. The Company relied on the B/E Aerospace TSA to provide the appropriate controls. The Company adopted its own set of policies, procedures and controls when it transitioned to its data center in April 2017. Substantially all of the policies, procedures and controls were in place prior to April 2017; however, the Company continues to document and test its internal controls over financial reporting and may make changes aimed at enhancing their effectiveness.
We disclosed in our Annual Report on Form 10-K for the year ended January 31, 2017 that management had concluded that our internal control over financial reporting was not effective as of January 31, 2017 due the design and operating effectiveness of controls over the evaluation of the accounting treatment of significant events and transactions. We are developing documentation to further improve these internal controls; however, no change in our Company’s internal control over financial reporting occurred during our first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There were no other changes in our internal control over financial reporting that occurred during the first quarter of fiscal 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.