KLX ENERGY SERVICES HOLDINGS, INC.
The following discussion and analysis should be read in conjunction with the
historical condensed consolidated financial statements and related notes
included elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report") as
well as our Annual Report on Form 10-K for the fiscal year ended January 31,
2021. This discussion contains forward-looking statements reflecting our current
expectations and estimates and assumptions concerning events and financial
trends that may affect our future operating results or financial position.
Actual results and the timing of events may differ materially from those
contained in these forward-looking statements due to a number of factors,
including those discussed in the sections entitled "Risk Factors" and
"Cautionary Statement Regarding Forward-Looking Statements" appearing elsewhere
in this Quarterly Report.
The following discussion and analysis addresses the results of KLX Energy
Services Holdings, Inc.'s (the "Company", "KLXE" or "KLX Energy Services")
operations for the three and nine months ended October 31, 2021 , as compared to
our results of operations for the three and nine months ended October 31, 2020 .
In addition, the discussion and analysis addresses our liquidity, financial
condition and other matters for these periods. The previously announced merger
of Krypton Merger Sub, Inc. , an indirect wholly owned subsidiary of KLXE
("Merger Sub"), with and into QES, with QES surviving the merger as a subsidiary
of KLXE (the "Merger") closed on July 28, 2020 . Unless otherwise noted or the
context requires otherwise, references herein to KLX Energy Services with
respect to time periods prior to July 28, 2020 include KLX Energy Services and
its consolidated subsidiaries and do not include QES and its consolidated
subsidiaries, while references herein to KLX Energy Services with respect to
time periods from and after July 28, 2020 include QES and its consolidated
subsidiaries.
Company History
KLX Energy Services was initially formed from the combination of seven private oilfield service companies acquired during 2013 and 2014. Each of the acquired businesses was regional in nature and brought one or two specific service capabilities toKLX Energy Services . Once the acquisitions were completed, we undertook a comprehensive integration of these businesses to align our services, our people and our assets across all the geographic regions where we maintain a presence. InNovember 2018 , we expanded our completion and intervention service offerings through the acquisition ofMotley Services, LLC ("Motley"), a premier provider of large diameter coiled tubing services, further enhancing our completions business. We successfully completed the integration of the Motley business during fiscal 2018. OnMarch 15, 2019 , the Company acquired Tecton Energy Services ("Tecton"), a leading provider of flowback, drill-out and production testing services, operating primarily in the greaterRocky Mountains . InMarch 2019 , the Company acquiredRed Bone Services LLC ("Red Bone"), a premier provider of oilfield services primarily in the Mid-Continent region, providing fishing, non-hydraulic fracturing high-pressure pumping, thru-tubing and certain other services. We successfully completed the integration of the Tecton and Red Bone businesses during fiscal 2019. We acquired QES during the second quarter of 2020 and, by doing so, helped establish KLXE as an industry leading provider of diversified oilfield solutions across the full well lifecycle to the major onshore oil and gas producing regions ofthe United States . OnJuly 26, 2020 , the Company's Board of Directors (the "Board") approved a 1-for-5 Reverse Stock Split. OnJuly 28, 2020 , we successfully completed the all-stock Merger with QES. At the time of the closing, the holders of QES common stock received 0.0969 shares of KLXE common stock in exchange for each share of QES common stock held. KLXE and QES stockholders owned approximately 59% and 41%, respectively, of the equity of the combined company on a fully-diluted basis. The Merger of KLXE and QES provided increased scale to serve a blue-chip customer base across the onshore oil and gas basins inthe United States . The Merger combined two strong company cultures comprised of highly talented teams with shared commitments to safety, performance, customer service and profitability. The combination leveraged two of the largest fleets of coiled tubing and wireline assets, and 23 -------------------------------------------------------------------------------- Table of Contents KLXE became a leading provider of large diameter coiled tubing and wireline services and one of the largest independent providers of directional drilling to the U.S. market.
After closing the Merger, the Company focused on integrating personnel, facilities, processes and systems across all functional areas of the organization.
By the end of first quarter of 2021, the Company had implemented approximately$46.0 of annualized cost savings. We continue to be diligently focused on generating additional cost savings from the Merger and to date have realized such savings through eliminating KLXE's legacy corporate headquarters inWellington ,Florida , rationalizing associated corporate functions toHouston , and capturing operational synergies in the areas of personnel, facilities and rolling stock. During the first quarter of 2021, we consolidated corporate offices inHouston, Texas and identified$4.4 of additional annualized fixed cost savings associated with headcount, facilities, changes to management processes and reduction in the size of the Board from nine directors to seven directors. These cost savings were fully implemented by the end of the second quarter and were completely realized during the third quarter. Additional synergies may be realized as management continues to rationalize operational facilities and align common roles, processes and systems throughout each function and region. The Merger also enhances the Company's ability to effect further industry consolidation. Looking ahead, the Company expects to pursue strategic, accretive consolidation opportunities that further strengthen the Company's competitive positioning and capital structure and drive efficiencies, accelerate growth and create longterm stockholder value.
Company Overview
We serve many of the leading companies engaged in the exploration and development of onshore conventional and unconventional oil and natural gas reserves inthe United States . Our customers are primarily large independent and major oil and gas companies. We currently support these customer operations from over 50 service facilities located in the key major basins. We operate in three segments on a geographic basis, including theSouthwest Region (thePermian Basin ,Eagle Ford Shale and theGulf Coast including industrial and petrochemical facilities), theRocky Mountains Region (the Bakken,Williston , DJ, Uinta,Powder River , Piceance and Niobrara basins) and theNortheast/Mid-Con Region (the Marcellus andUtica Shale as well as the Mid-Continent STACK and SCOOP andHaynesville Shale ). Our revenues, operating earnings and identifiable assets are primarily attributable to these three reportable geographic segments. While we manage our business based upon these geographic groupings, our assets and our technical personnel are deployed on a dynamic basis across all of our service facilities to optimize utilization and profitability. These expansive operating areas provide us with access to a number of nearby unconventional crude oil and natural gas basins, both with existing customers expanding their production footprint and third parties acquiring new acreage. Our proximity to existing and prospective customer activities allows us to anticipate or respond quickly to such customers' needs and efficiently deploy our assets. We believe that our strategic geographic positioning will benefit us as activity increases in our core operating areas. Our broad geographic footprint provides us with exposure to the ongoing recovery in drilling, completion, production and intervention related service activity and will allow us to opportunistically pursue new business in basins with the most active drilling environments. We work with our customers to provide engineered solutions across the lifecycle of the well by streamlining operations, reducing non-productive time and developing cost effective solutions and customized tools for our customers' challenging service needs, including their most technically complex extended reach horizontal wells. We believe future revenue growth opportunities will continue to be driven by increases in the number of new customers served and the breadth of services we offer to existing and prospective customers. 24 -------------------------------------------------------------------------------- Table of Contents We offer a variety of targeted services that are differentiated by the technical competence and experience of our field service engineers and their deployment of a broad portfolio of specialized tools and proprietary equipment. Our innovative and adaptive approach to proprietary tool design has been employed by our in-house research and development organization and, in selected instances, by our technology partners to develop tools covered by 28 patents and 7 pending patent applications, which we believe differentiates us from our regional competitors and also allows us to deliver more focused service and better outcomes in our specialized services than larger national competitors that do not discretely dedicate their resources to the services we provide. We utilize contract manufacturers to produce our products, which, in many cases, our engineers have developed from input and requests from our customers and customer-facing managers, thereby maintaining the integrity of our intellectual property while avoiding manufacturing startup and maintenance costs. This approach leverages our technical strengths, as well as those of our technology partners. These services and related products are modest in cost to the customer relative to other well construction expenditures but have a high cost of failure and are, therefore, mission critical to our customers' outcomes. We believe our customers have come to depend on our decades of field experience to execute on some of the most challenging problems they face. We believe we are well positioned as a company to service customers when they are drilling and completing complex wells, and remediating both newer and older legacy wells. We invest in innovative technology and equipment designed for modern production techniques that increase efficiencies and production for our customers. North American unconventional onshore wells are increasingly characterized by extended lateral lengths, tighter spacing between hydraulic fracturing stages, increased cluster density and heightened proppant loads. Drilling and completion activities for wells in unconventional resource plays are extremely complex, and downhole challenges and operating costs increase as the complexity and lateral length of these wells increase. For these reasons, exploration and production ("E&P") companies with complex wells increasingly prefer service providers with the scale and resources to deliver best-in-class solutions that evolve in real-time with the technology used for extraction. We believe we offer best-in-class service execution at the wellsite and innovative downhole technologies, positioning us to benefit from our ability to service technically complex wells where the potential for increased operating leverage is high due to the large number of stages per well. We endeavor to continue to build a next generation oilfield services company in terms of management controls, processes and operating metrics, and have driven these processes down through the operating management structure in every region, which we believe differentiates us from many of our competitors. This allows us to offer our customers in all of our geographic regions discrete, comprehensive and differentiated services that leverage both the technical expertise of our skilled engineers and our in-house research and development team.
Depreciation and Amortization
The Company changed its presentation of depreciation and amortization expense in the first quarter of 2021. Depreciation and amortization expense is presented separately from cost of sales and selling, general, and administrative expenses. Prior period results have been reclassified to conform with current presentation. During the quarter, as a result of increased usage from improving drilling activity levels and changes in the manner and conditions in which various types of our small tools are used, we updated the estimated useful lives of such tools to 1 - 3 years, resulting in approximately$0.2 of incremental monthly depreciation on a prospective basis.
Segment Reporting
During the third quarter of 2020, the Company changed its presentation of
reportable segments related to the allocation of corporate overhead costs to
reflect the presentation used by the Company's chief operational decision-making
group ("CODM") to make decisions about resources to be allocated to the
Company's reportable segments and to assess segment performance. Historically,
and through July 31, 2020 , the
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Company's total corporate overhead costs were allocated and reported within each
reportable segment. Starting in the third quarter of 2020, the Company changed
the corporate overhead allocation methodology to only include corporate costs
incurred on behalf of its operating segments, which includes accounts payable,
accounts receivable, insurance, audit, supply chain, health, safety and
environmental and others. The remaining unallocated corporate costs are reported
as a reconciling item in the Company's segment reporting disclosures. See Note
14 to the condensed consolidated financial statements for additional
information. As a result of the change in presentation, the total corporate
overhead costs allocated for the three and nine months ended October 31, 2020 to
the Company's three reportable segments decreased by $11.4 and $13.7 ,
respectively.
The Company also changed its presentation of service offering revenues.
Historically, and through January 31, 2020 , the Company's service offering
revenues included revenues from the completion, production and intervention
market types within segment reporting. During the third quarter of 2020, the
Company changed the presentation of its service offering revenues by separately
reporting a drilling market type revenue, which includes directional drilling,
drilling accommodation units and related drilling support services. The
reclassifications are retroactively reported in the Company's segment reporting
disclosures to reflect the drilling revenue change and use of the information by
the Company's CODM.
These changes in the Company's corporate allocation method and service offering
revenue disclosures have no net impact to the condensed consolidated financial
statements. The change better reflects the CODM's philosophy on assessing
performance and allocating resources as well as improves the Company's
comparability to its peer group.
On September 3, 2021 , the Board of the Company adopted the Fourth Amended and
Restated Bylaws of the Company, effective as of such date, to change the
Company's fiscal year-end from January 31 to December 31 , effective beginning
with the year ended December 31, 2021 . As a result, the Company's current fiscal
year 2021 will be shortened from 12 months to 11 months and end on December 31,
2021 . The Company is undertaking this change in an effort to normalize our
fiscal year-end and improve comparability with our peers.
Recent Trends and Outlook
Demand for services in the oil and natural gas industry is cyclical and subject
to sudden and significant volatility. Market demand for our services during 2020
was challenged due to the novel coronavirus ("COVID-19") pandemic and macro
supply and demand concerns. While the extent and duration of the continued
global impact of the COVID-19 pandemic is unknown, economic activity has
increased from the April 2020 lows, and signs of a potential global economic
recovery in fiscal 2021 have emerged, driven by the rollout of COVID-19
vaccines, fiscal and monetary stimulus policies, and pent-up demand for goods
and services.
Despite the market headwinds experienced in 2020, the Company remained focused
on building a leaner and more profitable set of service offerings, which allowed
us to make meaningful positive impacts to our revenue, operating margins, cash
flows and Adjusted EBITDA. See "How We Evaluate Our Operations" for additional
information. We have taken, and are continuing to take, steps to reduce costs,
including reductions in capital expenditures, as well as other workforce
rightsizing and ongoing streamlining initiatives.
In February of 2021, we experienced a material slow down due to the
unprecedented Winter Storm Uri, the costliest winter storm in U.S. history. As a
result of the storm conditions, our customers shut-in wells and delayed work,
causing us at least seven days of lost revenue, primarily in the Permian and the
Mid-continent regions.
So far in fiscal 2021, West Texas Intermediate ("WTI") prices have increased an
incremental 16.4% from May 1 to July 31 and another 12.9% from July 31 to
October 31 . In response, the United States has continued to increase drilling
and completion activity levels relative to where the market exited 2020. As of
October 31, 2021 , U.S. rig count was up to 544, an increase of 11.5% since
July 31, 2021 . Additionally, we
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have continued to see U.S. shale operators consolidate within certain basins,
particularly the Permian and Rocky Mountains , and many public operators have
announced that they are targeting oil and gas production at the end of 2021 to
be consistent with production levels at year end 2020.
We saw a meaningful increase in overall activity throughout the first three
quarters of 2021, as commodity prices have reached levels last seen in 2014.
Looking ahead to the remainder of fiscal 2021, provided that the impact of the
COVID-19 pandemic lessens, economic activity continues to increase, and
commodity prices remain strong, we expect to experience further increases in
activity and corresponding improvements in the price of our products and
services.
We believe our diverse product and service offerings uniquely positions KLXE to
respond to a rapidly evolving marketplace where we can provide a comprehensive
suite of engineered solutions for our customers with one call and one master
services agreement.
How We Generate Revenue and the Costs of Conducting Our Business
Our business strategy seeks to generate attractive returns on capital by providing differentiated services and prudently applying our cash flow to select targeted opportunities, with the potential to deliver high returns that we believe offer superior margins over the long-term and short payback periods. Our services generally require equipment that is less expensive to maintain and is operated by a smaller staff than many other oilfield service providers. As part of our returns-focused approach to capital spending, we are focused on efficiently utilizing capital to develop new products. We support our existing asset base with targeted investments in research and development, which we believe allows us to maintain a technical advantage over our competitors providing similar services using standard equipment. Demand for services in the oil and natural gas industry is cyclical and subject to sudden and significant volatility. We remain focused on serving the needs of our customers by providing a broad portfolio of product service lines across all major basins, while preserving a solid balance sheet, maintaining sufficient operating liquidity and prudently managing our capital expenditures. We believe our operating cost structure is now materially lower than during historical financial reporting periods and the realization of the$50.4 of cost synergies associated with the Merger has further reduced our cost structure and afforded us greater flexibility to respond to changing industry conditions. The implementation of integrated, company-wide management information systems and processes provides more transparency to current operating performance and trends within each market where we compete and helps us more acutely scale our cost structure and pricing strategies on a market-by-market basis. The potential for further cost savings remains as we continue to refine and optimize the business moving forward. We believe our ability to differentiate ourselves on the basis of quality provides an opportunity for us to gain market share and increase our share of business with existing customers. We believe we have strong management systems in place which will allow us to manage our operating resources and associated expenses relative to market conditions. Historically, we believe our services generated margins superior to our competitors based upon the differential quality of our performance, and that these margins would contribute to future cash flow generation. The required investment in our business includes both working capital (principally for accounts receivable, inventory and accounts payable growth tied to increasing activity) and capital expenditures for both maintenance of existing assets and ultimately growth when economic returns justify the spending. Our required maintenance capital expenditures tend to be lower than other oilfield service providers due to the generally asset-light nature of our services, the younger average age of our assets and our ability to charge back a portion of asset maintenance to customers for a number of our assets. 27
-------------------------------------------------------------------------------- Table of Contents How We Evaluate Our Operations
Key Financial Performance Indicators
We recognize the highly cyclical nature of our business and the need for metrics to (1) best measure the trends in our operations and (2) provide baselines and targets to assess the performance of our managers.
The measures we believe most effective to achieve the above stated goals include:
•Revenue
•Adjusted Earnings before interest, taxes, depreciation and amortization
("Adjusted EBITDA"): Adjusted EBITDA is a supplemental non-Generally Accepted
Accounting Principles financial measure that is used by management and external
users of our financial statements, such as industry analysts, investors, lenders
and rating agencies. Adjusted EBITDA is not a measure of net earnings or cash
flows as determined by Generally Accepted Accounting Principles ("GAAP"). We
define Adjusted EBITDA as net earnings (loss) before interest, taxes,
depreciation and amortization, further adjusted for (i) goodwill and/or
long-lived asset impairment charges, (ii) stock-based compensation expense,
(iii) restructuring charges, (iv) transaction and integration costs related to
acquisitions and (v) other expenses or charges to exclude certain items that we
believe are not reflective of ongoing performance of our business.
•Adjusted EBITDA Margin: Adjusted EBITDA Margin is defined as Adjusted EBITDA, as defined above, as a percentage of revenue.
We believe Adjusted EBITDA is useful because it allows us to supplement the GAAP
measures in order to evaluate our operating performance and compare the results
of our operations from period to period without regard to our financing methods
or capital structure. We exclude the items listed above in arriving at Adjusted
EBITDA (Loss) because these amounts can vary substantially from company to
company within our industry depending upon accounting methods, book values of
assets, capital structures and the method by which the assets were acquired.
Adjusted EBITDA should not be considered as an alternative to, or more
meaningful than, net (loss) earnings as determined in accordance with GAAP, or
as an indicator of our operating performance or liquidity. Certain items
excluded from Adjusted EBITDA are significant components in understanding and
assessing a company's financial performance, such as a company's cost of capital
and tax structure, as well as the historic costs of depreciable assets, none of
which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may
not be comparable to other similarly titled measures of other companies.
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Results of Operations
Three Months Ended October 31, 2021 Compared to Three Months Ended October 31,
2020 Revenue. The following is a summary of revenue by segment:
Three Months Ended
October 31, 2021 October 31, 2020 % Change
Revenue:
Rocky Mountains $ 36.5 $ 18.2 100.5 %
Southwest 45.8 24.8 84.7 %
Northeast/Mid-Con 56.7 27.9 103.2 %
Total revenue $ 139.0 $ 70.9 96.1 %
For the quarter ended October 31, 2021 , revenues were $139.0 , an increase of
$68.1 , or 96.1%, as compared with the prior year period. Rocky Mountains segment
revenue increased by $18.3 , or 100.5%, Southwest segment revenue increased
$21.0 , or 84.7%, and Northeast/Mid-Con segment revenue increased by $28.8 , or
103.2%. The increases in all three operating segments were driven by a
combination of increased pricing for the Company's products and services as well
as increased activity. In the current quarter, rig count increased to 544, by
248 or 84% as compared to the same period of the prior year. This was driven by
an increase in production activity across all three of our operating segments.
Additionally, pricing has increased materially across most of our product
service lines as compared to the same period of the prior year.
On a product line basis, drilling, completion, production and intervention
services contributed approximately 27.8%, 48.8%, 14.0% and 9.4%, respectively,
to revenue for the three months ended October 31, 2021 and 21.6%, 43.9%, 10.6%
and 24.0%, respectively, for the three months ended October 31, 2020 . The most
significant contribution to the increase came from drilling, which increased by
$23.4 , or 152.9%, due to the directional drilling service revenues acquired in
the Merger with QES. Completion, production and intervention services revenues
changed by approximately $36.6 or 117.7%, $12.0 or 160.0% and $(3.9) or (22.9)%,
respectively, as compared to the same period in the prior year.
Cost of sales. For the quarter ended October 31, 2021 , cost of sales were
$120.7 , or 86.8% of revenues, as compared to the prior year period of $65.6 , or
92.5% of revenues. Cost of sales as a percentage of revenues decreased primarily
due to the improvement in pricing discussed above, which has more than offset
cost pressures related to labor and supply chain.
Selling, general and administrative expenses. For the quarter ended October 31,
2021 , selling, general and administrative ("SG&A") expenses were $14.8 , or 10.6%
of revenues, as compared with $14.1 , or 19.9% of revenues, in the prior year
period. Decrease in SG&A as a percentage of revenues was driven primarily by the
improvement in pricing discussed above. Additionally, SG&A expenses for the
quarter ended October 31, 2020 , included $2.7 of merger and integration costs.
Operating loss. The following is a summary of operating income (loss) by
segment:
Three Months Ended
October 31, 2021 October 31, 2020 % Change
Operating loss:
Rocky Mountains $ (1.7) $ (4.6) 63.0 %
Southwest (4.1) (9.3) 55.9 %
Northeast/Mid-Con 1.7 (5.1) 133.3 %
Corporate and other(1) (6.3) (11.4) 44.7 %
Total operating loss(1) $ (10.4) $ (30.4) 65.8 %
(1) Includes reduction in bargain purchase gain of
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For the quarter ended October 31, 2021 , operating loss was $10.4 compared to
operating loss of $30.4 in the prior year period, due to above increases in
activity and improvements in pricing, along with synergies implemented related
to integration of the Merger and consolidating operating facilities and
headcount. Additionally, operating loss for Corporate and other for the quarter
ended October 31, 2020 includes $2.4 of a non-recurring reduction in bargain
purchase gain.
Results improved in all segments compared to prior year period, as Rocky
Mountains segment operating loss was $1.7 , Southwest segment operating loss was
$4.1 , and Northeast/Mid-Con segment operating income was $1.7 for the three
months ended October 31, 2021 , in each case primarily driven by increased
activity due to higher rig count, improved pricing, and a reduced cost structure
driven by successful integration of the QES business.
Income tax expense. For the quarter ended October 31, 2021 , income tax expense
was $0.2 , which was consistent with the prior year period, and was comprised
primarily of state and local taxes. The Company did not recognize a tax benefit
on its year-to-date losses because it has a valuation allowance against its
deferred tax balances, which prevents the Company from recording such benefit.
Net loss. For the quarter ended
Results of Operations Nine Months EndedOctober 31, 2021 Compared to Nine Months EndedOctober 31, 2020
Revenue. The following is a summary of revenue by segment:
Nine Months Ended
October 31, 2021 October 31, 2020 % Change
Revenue:
Rocky Mountains $ 94.4 $ 70.1 34.7 %
Southwest 126.8 53.4 137.5 %
Northeast/Mid-Con 120.5 66.6 80.9 %
Total revenue $ 341.7 $ 190.1 79.7 %
For the nine months ended October 31, 2021 , revenues were $341.7 , an increase of
$151.6 , or 79.7%, as compared with the prior year period. Rocky Mountains
segment revenue increased by $24.3 , or 34.7%, Southwest segment revenue
increased $73.4 , or 137.5%, and Northeast/Mid-Con segment revenue increased by
$53.9 , or 80.9%. The increases in all three operating segments were driven by a
combination of increased pricing for the Company's products and services as well
as increased activity. In the current quarter, rig count increased to 544, by
248 or 84% as compared to the same period of the prior year. This was driven by
an increase in production activity across all three of our operating segments.
Additionally, pricing has increased materially across most of our product
service lines as compared to the same period of the prior year.
On a product line basis, drilling, completion, production and intervention
services contributed approximately 27.9%, 47.9%, 14.1% and 10.1%, respectively,
to revenue for the nine months ended October 31, 2021 and 14.2%, 48.6%, 14.3%
and 22.9%, respectively, for the nine months ended October 31, 2020 . The most
significant contribution to the increase came from drilling, which increased by
$68.5 , or 254.6%, due to the directional drilling service revenues acquired in
the Merger with QES. Completion, production, and intervention services revenues
changed by approximately $71.4 or 77.3%, $20.9 or 76.8% and $(9.2) or (21.1)%,
respectively, as compared to the same period in the prior year.
Cost of sales. For the nine months ended October 31, 2021 , cost of sales were
$308.5 , or 90.3% of revenues, as compared to the prior year period of $180.5 , or
95.0% of revenues. Cost of sales as a
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percentage of revenues decreased primarily due to the improvement in pricing
discussed above, which has more than offset cost pressures related to labor and
supply chain.
Selling, general and administrative expenses. For the nine months ended
October 31, 2021 , SG&A expenses were $44.1 , or 12.9% of revenues, as compared
with $69.6 , or 36.6% of revenues, in the prior year period. Decreases in SG&A
expense and SG&A as a percentage of revenues were driven by the improvement in
pricing discussed above. Additionally, SG&A expenses for the nine months ended
October 31, 2020 , included $28.9 of merger and integration costs.
Operating loss. The following is a summary of operating loss by segment:
Nine Months Ended
October 31, 2021 October 31, 2020 % Change
Operating loss:
Rocky Mountains $ (11.1) $ (45.3) 75.5 %
Southwest (15.3) (114.6) 86.6 %
Northeast/Mid-Con (8.9) (105.2) 91.5 %
Corporate and other (20.9) (13.7) (52.6) %
Total operating loss(1) $ (56.2) $ (278.8) 79.8 %
(1) Includes bargain purchase gain of
For the nine months endedOctober 31, 2021 , operating loss was$56.2 compared to operating loss of$278.8 in the prior year period, due to a decrease in impairment and other charges from$213.1 in 2020 to$0.8 in 2021, as well as due to above increases in activity and improvements in pricing, along with synergies implemented related to integration of the Merger and consolidating operating facilities and headcount. Results improved in all segments compared to the prior year period, asRocky Mountains segment operating loss was$11.1 , Southwest segment operating loss was$15.3 , and Northeast/Mid-Con segment operating loss was$8.9 for the nine months endedOctober 31, 2021 , in each case primarily driven by lower impairment and other charges as well as higher rig count and improved pricing. Income tax expense. For the nine months endedOctober 31, 2021 , income tax expense was$0.4 , as compared to income tax expense of$0.3 in the prior year period, and was comprised primarily of state and local taxes. The Company did not recognize a tax benefit on its year-to-date losses because it has a valuation allowance against its deferred tax balances, which prevents the Company from recording such benefit. Net loss. For the nine months endedOctober 31, 2021 , net loss was$80.6 , as compared to$301.8 in the prior year period, primarily due to a decrease in impairment and other charges from$213.1 in 2020 to$0.8 in 2021, along with above-mentioned increase in activity as well as improvements in pricing. Liquidity and Capital Resources We require capital to fund ongoing operations, including maintenance expenditures on our existing fleet and equipment, organic growth initiatives, investments and acquisitions. Our primary sources of liquidity to date have been capital contributions from our equity and note holders and borrowings under the Company's senior secured credit agreement datedAugust 10, 2018 ("ABL Facility") and cash flows from operations. AtOctober 31, 2021 , we had$40.8 of cash and cash equivalents and total$40.0 available and net$30.0 available after$10.0 fixed charge coverage ratio ("FCCR") holdback on theOctober 31, 2021 ABL Facility Borrowing Base Certificate, which resulted in a total liquidity position of$80.8 and a net liquidity position of$70.8 . Our cash flow used in operations for the nine months endedOctober 31, 2021 was approximately$43.2 as compared to approximately$35.8 used in operations for the same period in 2020. In response to declining customer activity and commodity price instability, in the third quarter of 2020 we implemented actions to achieve our previously announced annualized run-rate cost synergies. By the end of first quarter of 2021, the 31 -------------------------------------------------------------------------------- Table of Contents Company implemented approximately$46.0 of annualized cost savings and also identified and actioned an additional$4.4 of annualized cost savings. However, there is no certainty that cash flow will improve or that we will have positive operating cash flow for a sustained period of time. Our operating cash flow is sensitive to many variables, the most significant of which are utilization and profitability, the timing of billing and customer collections, payments to our vendors, repair and maintenance costs and personnel, any of which may affect our available cash. The COVID-19 pandemic and the related significant decrease in the price of oil resulted in a decrease in demand for our services in the last part of the first quarter through the third quarter of 2020. We started to see a moderate increase in overall activity throughout the first three quarters of 2021, which we expect to continue into the remainder of the fiscal year. Additionally, should our customers experience financial distress due to the current market conditions, they could default on their payments owed to us, which would affect our cash flows and liquidity. As ofOctober 31, 2021 , we have$5.0 of trade accounts receivable reserved for customers in bankruptcy, primarily related to Magellan. See Part II, Item 1 "Legal Proceedings" for more information regarding the amount due from Magellan. Our primary use of capital resources has been for funding working capital and investing in property and equipment used to provide our services. We actively manage our capital spending and are focused on required maintenance spending. In addition, we regularly monitor potential sources of capital, including equity and debt financings, in an effort to meet our planned capital expenditure and liquidity requirements and reduce cost. The COVID-19 pandemic, coupled with the global crude oil supply and demand imbalance and the resulting volatility inU.S. onshore oil and gas activity, has significantly affected the value of our common stock, which, without a viable recovery and uptick in the demand for our services, may reduce our ability to access capital in the bank and capital markets, including through equity or debt offerings. AtOctober 31, 2021 , we had$40.8 of cash and cash equivalents. Cash on hand atOctober 31, 2021 decreased by$6.3 , as compared with$47.1 cash on hand atJanuary 31, 2021 as a result of$43.2 of cash used in operating activities offset by$6.2 of cash provided by investing activities and$30.7 of cash provided by financing activities. Our liquidity requirements consist of working capital needs, debt service obligations and ongoing capital expenditure requirements. Our primary requirements for working capital are directly related to the activity level of our operations.
The following table sets forth our cash flows for the periods presented below:
Nine Months Ended
October 31, 2021 October 31, 2020
Net cash used in operating activities $ (43.2) $ (35.8)
Net cash provided by (used in) investing activities 6.2 (10.3)
Net cash provided by financing activities 30.7 2.4
Net change in cash (6.3) (43.7)
Cash balance end of period $ 40.8 $ 79.8
Net cash used in operating activities
Net cash used in operating activities was$43.2 for the nine months endedOctober 31, 2021 , as compared to$35.8 for the nine months endedOctober 31, 2020 . The decrease in operating cash flows was primarily attributable to working capital investments associated with increased accounts receivable from associated increased revenue and utilization.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was$6.2 for the nine months endedOctober 31, 2021 , as compared to net cash used in investing activities of$10.3 for the nine months endedOctober 31, 2020 . The increase in investing cash flows for the nine months endedOctober 31, 2021 was primarily driven by sales of facilities, trucks and other idle assets resulting from cost reduction initiatives, as well as lost-in-hole tools billed to customers as a result of increased activity. 32 -------------------------------------------------------------------------------- Table of Contents Net cash provided by financing activities Net cash provided by financing activities was$30.7 for the nine months endedOctober 31, 2021 , compared to$2.4 for the nine months endedOctober 31, 2020 . During the nine months endedOctober 31, 2021 , borrowings under the ABL facility were$30.0 and proceeds from stock issuance, net of costs were$4.8 , offset by$1.8 paid on financed payables,$2.0 paid on capital lease obligations, and$0.3 paid for treasury shares in connection with the settlement of income tax and related benefit withholding obligations arising from vesting of restricted stock grants under the Company's long-term incentive program.
Financing Arrangements
We entered into a$100.0 ABL Facility onAugust 10, 2018 . The ABL Facility became effective onSeptember 14, 2018 and is scheduled to mature inSeptember 2023 . Borrowings under the ABL Facility bear interest at a rate equal to the London Interbank Offered Rate ("LIBOR") (as defined in the ABL Facility) plus the applicable margin (as defined). Availability under the ABL Facility is tied to a borrowing base formula and the ABL Facility has no maintenance financial covenants as long as we maintain a minimum level of borrowing availability. The ABL Facility is secured by, among other things, a first priority lien on our accounts receivable and inventory and contains customary conditions precedent to borrowing and affirmative and negative covenants. There was$30.0 outstanding under the ABL Facility as ofOctober 31, 2021 . Total letters of credit outstanding under the ABL Facility were$5.0 atOctober 31, 2021 . The effective interest rate under the ABL Facility was approximately 4.75% onOctober 31, 2021 . Accrued interest as ofOctober 31, 2021 was$0.3 . Financial Services industry and market participants continue to work towards transitioning away from interbank offered rates ("IBOR"), including the LIBOR, that are being phased out imminently. This phasing out will have an impact on the ABL Facility that utilizes LIBOR as a benchmark. To transition from IBOR Reference Rate, the ABL Facility agreement between the Company andJP Morgan Chase & Co. ("JP Morgan"), which currently has borrowings outstanding of$30.0 , will be amended to adopt an alternate rate effective on or beforeJune 30, 2023 . Until the ABL Facility agreement is amended to allow for Secured Overnight Financing Rate ("SOFR") as the replacement to LIBOR, the Alternate Base Rate ("ABR"), is the default rate that JP Morgan has agreed to use as the LIBOR replacement. See Note 2 for further discussion of upcoming changes from LIBOR to Term SOFR. The ABL Facility includes a springing financial covenant which requires the Company's consolidated FCCR to be at least 1.0 to 1.0 if availability falls below the greater of$10.0 or 15% of the borrowing base. At all times during the nine months endedOctober 31, 2021 , availability exceeded this threshold, and the Company was not subject to this financial covenant. As ofOctober 31, 2021 , the FCCR was below 1.0 to 1.0. The Company was in full compliance with its credit facility as ofOctober 31, 2021 . In conjunction with the acquisition of Motley in 2018, we issued$250.0 principal amount of 11.5% senior secured notes due 2025 (the "Notes") offered pursuant to Rule 144A under the Securities Act of 1933 (as amended, the "Securities Act") and to certain non-U.S. persons outsidethe United States in compliance with Regulation S under the Securities Act. On a net basis, after taking into consideration the debt issuance costs for the Notes, total debt as ofOctober 31, 2021 was$244.6 . The Notes bear interest at an annual rate of 11.5%, payable semi-annually in arrears onMay 1 andNovember 1 . Accrued interest as ofOctober 31, 2021 was$14.4 .
Capital Requirements and Sources of Liquidity
Our capital expenditures were$7.5 during the nine months endedOctober 31, 2021 , compared to$11.1 in the nine months endedOctober 31, 2020 . We expect to incur a total between$9.0 to$11.0 in capital expenditures for the year endingDecember 31, 2021 , based on current industry conditions. This is more than a 30% reduction from the previous range of$14.0 to$16.0 , partially driven by the change in year-end. The nature of our capital expenditures is comprised of a base level of investment required to support our current operations and amounts related to growth and Company initiatives. Capital expenditures for growth and 33 -------------------------------------------------------------------------------- Table of Contents Company initiatives are discretionary. We continually evaluate our capital expenditures, and the amount we ultimately spend will depend on a number of factors, including expected industry activity levels and Company initiatives. We expect to fund future capital expenditures from cash on hand, the ABL Facility availability, Equity Distribution Agreement (defined below) and cash flow from operations. We have total funds available of$40.0 and net funds available of$30.0 , after$10.0 FCCR holdback, as ofOctober 31, 2021 , from our$100.0 ABL Facility (under which the amount of availability depends in part on a borrowing base tied to the aggregate amount of our accounts receivable and inventory satisfying specified criteria and our compliance with a minimum fixed charge coverage ratio). Our ability to satisfy our liquidity requirements depends on our future operating performance, which is affected by prevailing economic and political conditions, the level of drilling, completion, production and intervention services activity for North American onshore oil and natural gas resources, the continuation of the COVID-19 pandemic, and financial and business and other factors, many of which are beyond our control. We believe based on our current forecasts, our cash on hand, the ABL Facility availability, the Equity Distribution Agreement (defined below), together with our cash flows, will provide us with the ability to fund our operations, meet our debt service obligations, and make planned capital expenditures for at least the next 12 months. However, we can make no assurances regarding our ability to achieve our forecasts, which are materially dependent on our financial performance and demand for our services. The Company also continues to assess various sources and options including public and private financings to bolster its liquidity and believes that, given current market conditions, it has opportunities to do so, however, there are no guarantees regarding these future financings.
Equity Distribution Agreement
OnJune 14, 2021 , the Company entered into an Equity Distribution Agreement (the "Equity Distribution Agreement") withPiper Sandler & Co. as sales agent (the "Agent"). Pursuant to the terms of the Equity Distribution Agreement, the Company may sell from time to time through the Agent (the "Offering") the Company's common stock, par value$0.01 per share, having an aggregate offering price of up to$50.0 (the "Common Stock"). Any Common Stock offered and sold in the Offering will be issued pursuant to the Company's shelf registration statement on Form S-3 (Registration No. 333-256149) filed with theSEC onMay 14, 2021 and declared effective onJune 11, 2021 (the "Registration Statement"), the prospectus supplement relating to the Offering filed with theSEC onJune 14, 2021 and any applicable additional prospectus supplements related to the Offering that form a part of the Registration Statement. Sales of Common Stock under the Equity Distribution Agreement may be made in any transactions that are deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"). The Equity Distribution Agreement contains customary representations, warranties and agreements by the Company, indemnification obligations of the Company and the Agent, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. Under the terms of the Equity Distribution Agreement, the Company will pay the Agent a commission equal to 3% of the gross sales price of the Common Stock sold. The Company plans to use the net proceeds from the Offering, after deducting the Agent's commissions and the Company's offering expenses, for general corporate purposes, which may include, among other things, paying or refinancing all or a portion of the Company's then-outstanding indebtedness, and funding acquisitions, capital expenditures and working capital. During the three and nine months endedOctober 31, 2021 , the Company sold 1,070,000 and 1,130,216 shares of Common Stock, respectively, for gross proceeds of approximately$4.9 and$5.5 , respectively, and paid legal and administrative fees of$0.1 and$0.7 , respectively. 34 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations As a smaller reporting company, we are not required to provide the disclosure required by Item 303(a)(5)(i) of Regulation S-K. Off-Balance Sheet Arrangements
Indemnities, Commitments and Guarantees
In the normal course of our business, we make certain indemnities, commitments and guarantees under which we 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 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 that are not reasonably determinable. Our management believes that any liability for these indemnities, commitments and guarantees would not be material to our financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees. We have employment agreements with certain key members of management expiring on various dates. Our 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 in control.
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 consolidated balance sheets. AtOctober 31, 2021 , future minimum lease payments under these arrangements approximated$69.6 of which$30.1 is related to long-term real estate leases and$23.5 is related to long-term coiled tubing unit leases. 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 2020 Annual Report on Form 10-K filed with theSEC onApril 28, 2021 .
Recent Accounting Pronouncements
See Note 2 "Recent Accounting Pronouncements" to our condensed consolidated
financial statements for a discussion of recently issued accounting
pronouncements. As an "emerging growth company" under the Jumpstart Our Business
Startups Act (the "JOBS Act"), we are offered an opportunity to use an extended
transition period for the adoption of new or revised financial accounting
standards. We operate under the reduced reporting requirements and exemptions,
including the longer phase-in periods for the adoption of new or revised
financial accounting standards, until we are no longer an emerging growth
company. Our election to use the phase-in periods permitted by this election may
make it difficult to compare our financial statements to those of non-emerging
growth companies and other emerging growth companies that have opted out of the
longer phase-in periods under Section 107 of the JOBS Act and who will comply
with new or
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Table of Contents revised financial accounting standards. If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
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