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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

 

Amendment No. 2

 

(Mark One)

 

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

 

For the fiscal year ended: January 31, 2016

 

or

 

 

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

 

For the transition period from ______   to _______

 

Commission File Number: 001-36610 

 

KLX INC. 

(Exact name of registrant as specified in its charter) 

 

Delaware(State of incorporationor organization)

47-1639172(I.R.S. Employer Identification No.)

 

1300 Corporate Center Way, 

Wellington, Florida 

(Address of principal executive offices) 

 

(561) 383-5100 

(Registrant’s telephone number, including area code) registered pursuant to Section 12(b) of the Act: 

 

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 Par Value

 

The NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None. 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒.  

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‐T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐.  

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

 

 

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

Non‐accelerated filer ☐(do not check if asmaller reporting company)

Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.  

 

As of July 31, 2015, the aggregate market value of the registrant’s voting stock held by non-affiliates was approximately $2,072 million. Shares of common stock held by executive officers and directors have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not a determination for any other purpose. The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of March 18, 2016 was 52,786,474 shares. 

 

DOCUMENTS INCORPORATED BY REFERENCE 

 

Certain sections of the registrant’s Proxy Statement to be filed with the Commission in connection with the 2016 Annual Meeting of Stockholders or Annual Report on Form 10-K/A, to be filed with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year, are incorporated by reference in Part III of this Form 10-K. With the exception of those sections that are specifically incorporated by reference in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed filed as part of this Report or incorporated by reference herein.

 

 

			 		

			 		

 

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TABLE OF CONTENTS 

 

 

 

 

 

 

Page

 

Explanatory Note
2

 

PART II
 

ITEM 9A. 
Controls and Procedures
3

 

PART IV
 

ITEM 15. 
Exhibits and Financial Statement Schedules
8

 

Signatures
9

 

Index to Consolidated and Combined Financial Statements and Schedule
F-1

 

 

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EXPLANATORY NOTE

 

KLX Inc. (the “Company,” “we,” “us,” or “our”) is filing this Amendment No. 2 on Form 10-K/A (this “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended January 31, 2016, which was originally filed on March 24, 2016 (the “Original Filing”), to amend and restate Item 9A of Part II, “Controls and Procedures,” with respect to (1) our conclusions regarding the effectiveness of our disclosure controls and procedures and our internal control over financial reporting and (2) Deloitte & Touche LLP’s related attestation report due to a material weakness in our internal control over financial reporting identified subsequent to the issuance of our Original Filing.  Item 15 of Part IV, “Exhibits and Financial Statement Schedules,” has also been amended to revise the reference to Deloitte’s opinion on our Internal Control Over Financial Reporting in its Report of Independent Registered Public Accounting Firm on our consolidated and combined financial statements and financial statement schedule as of January 31, 2016 and 2015, the three years ended January 31, 2016, December 31, 2014 and December 31, 2013, and the one-month period ended January 31, 2015.

 

While there is no requirement for any adjustments or restatement to our annual financial statements for any of the last three completed fiscal years, for any of the quarters of our last completed fiscal year or for the one-month transition period prior to our last completed fiscal year, the possibility existed at January 31, 2016 that an identified weakness in our internal controls could have resulted in a material error in our financial results which may not have been detected in a timely manner.

 

The Company has enhanced and strengthened its methodology for estimating the excess and obsolete (“E&O”) inventory provision in order to remediate this weakness. Management believes the enhancements which it has developed remediated the weakness that existed at January 31, 2016.

 

As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the certifications required by Rule 13a-14(a) under the Exchange Act are also being filed as exhibits to this Amendment. This Amendment should be read in conjunction with the Original Filing, which continues to speak as of the date of the Original Filing. Except as specifically noted above, this Amendment does not modify or update disclosures in the Original Filing. Accordingly, this Amendment does not reflect events occurring after the filing of the Original Filing or modify or update any related or other disclosures. 

 

2

 

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PART II 

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of 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 January 31, 2016, of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Previously, based on that evaluation, our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of January 31, 2016. However, due to the material weakness in internal control over financial reporting described below, our Chief Executive Officer, Chief Operating Officer Chief Financial Officer and key segment management have now concluded that our disclosure controls and procedures were not effective as of January 31, 2016.

 

Changes in Internal Control Over Financial Reporting 

 

There were no changes in our internal control over financial reporting that occurred during the fourth quarter of Fiscal 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3

 

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MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (REVISED)

 

The management of KLX is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles.  

 

The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and the receipts and expenditures of the Company are being made only in accordance with authorizations of the management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.  

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.  

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of January 31, 2016. In making the assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control –  Integrated Framework (2013).  

 

Previously, based on its assessment, management believed that, as of January 31, 2016, the Company’s internal control over financial reporting was effective.  

 

Subsequent to the issuance of the Original Filing, as part of its regular review of selected audits of public accounting firms, the Public Company Accounting Oversight Board (“PCAOB”) conducted a review and inspection of Deloitte & Touche LLP’s (“Deloitte”) audit of KLX’s financial statements for the year ended January 31, 2016, after which the PCAOB provided comments to Deloitte (the “PCAOB Inspection Comments”). Following the PCAOB inspection, Deloitte requested a reevaluation of the adequacy of the controls related to the determination of the Company’s reserve for E&O inventories as well as the precision and specificity to which these review controls were executed and documented. 

 

The Company previously used a demand and aging based model to determine the E&O reserve and has subsequently developed an alternative demand based model which produced a reserve result that was materially consistent with previously recorded reserves. As a result, no adjustment or restatement to the historical financial statements was required.

 

Although no adjustment or restatement to previously issued financial statements was necessary, since a historical demand based E&O reserve model was not in place as of January 31, 2016, and the possibility of a material misstatement was not sufficiently mitigated by other compensating review controls, after consultation with the Board of Directors of the Company and Deloitte, on September 7, 2016, it was determined that there is a material weakness in the design and operating effectiveness of the Company’s review controls related to the E&O reserve. Accordingly, management has concluded that the Company’s internal control over financial reporting was not sufficiently comprehensive and therefore ineffective as of January 31, 2016. Consequently, the Company has revised its report on internal control over financial reporting.  Deloitte has issued  the revised attestation report below regarding the Company’s internal control over financial reporting.

4

 

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REMEDIATION STATUS

 

As of the date of this filing, the Company has implemented the aforementioned new demand based model for estimating the required E&O inventory reserve and has modified its existing controls over the review of the demand based model and as a result, has remediated the material weakness in internal controls. The new demand based methodology considers historical demand of our inventory to project future demand in order to estimate the provision required for E&O inventories. Other factors considered in the methodology include expected market growth rates, the nature of the inventory (proprietary parts or parts used across multiple aircraft types), whether the parts are currently produced or subject to a contract and other related elements. Management believes the aforementioned changes provide sufficient controls to remediate the aforementioned material weakness in internal controls.

5

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders of

KLX Inc.

Wellington, Florida

 

We have audited KLX Inc. and subsidiaries (the "Company's") internal control over financial reporting as of January 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Revised). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our report dated March 24, 2016, we expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. As described in the following paragraphs, the Company subsequently identified a material weakness in its internal control over financial reporting. Accordingly, management has revised its assessment about the effectiveness of the Company’s internal control over financial reporting, and our present opinion on the effectiveness of the Company’s internal control over financial reporting as of January 31, 2016, as expressed herein, is different than that expressed in our previous report.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: a material weakness in the design and operating effectiveness of the Company’s review controls related to the reserve for excess and obsolete (“E&O”) inventories.  This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and 

6

 

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financial statement schedule as of and for the year ended January 31, 2016, of the Company and this report does not affect our report on such financial statements and financial statement schedule.

 

In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of January 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 31, 2016, of the Company and our report dated March 24, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the basis of presentation of the consolidated and combined financial statements and financial statement schedule. 

 

/s/ Deloitte & Touche LLP 

Certified Public Accountants

 

Boca Raton, Florida

March 24, 2016 (September 8, 2016 as to the effects of the material weakness as described in Management’s Annual Report on Internal Control over Financial Reporting (Revised))

7

 

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PART IV 

 

ITEM 15. EXHIBITS_ AND FINANCIAL STATEMENT SCHEDULES 

 

(a)Financial Statements

 

The information required by this item is contained under the section “Index to Consolidated and Combined Financial Statements and Schedule” beginning on page F‐1 of this Form 10‐K/A.

 

(b)Exhibits 

 

We are filing the following documents as exhibits to this Form 10-K/A: 

 

Exhibit No.

    

Description

23.1

 

Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP

31.1

 

Certification of Chief Executive Officer

31.2

 

Certification of Chief Financial Officer

31.3

 

Certification of Chief Operating Officer

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

32.3

 

Certification of Chief Operating Officer pursuant to 18 U.S.C. Section 1350

 

8

 

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SIGNATURES 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

KLX INC.

 

By:

/s/ Amin J. Khoury

 

 

Amin J. Khoury

 

 

Chairman and Chief Executive Officer

 

Date: September 8, 2016 

 

			 		

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INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS AND SCHEDULE

 

 

 

 

Page

Report of Independent Registered Public Accounting Firm 
F‐2

Consolidated and Combined Financial Statements:

 

Consolidated Balance Sheets as of January 31, 2016 and 2015 
F‐3

Consolidated and Combined Statements of Earnings and Comprehensive Income for the Years Ended January 31, 2016, December 31, 2014 and 2013 and the One Month Ended January 31, 2015 
F‐4

Consolidated and Combined Statements of Stockholders’ Equity for the Periods Ended January 31, 2016 and 2015 and December 31, 2014 and 2013 
F‐5

Consolidated and Combined Statements of Cash Flows for the Years Ended January 31, 2016, December 31, 2014 and 2013 and the One Month Ended January 31, 2015 
F‐6

Notes to Consolidated and Combined Financial Statements for the Years Ended January 31, 2016, December 31, 2014 and 2013 and the One Month Ended January 31, 2015 
F‐7

Consolidated and Combined Financial Statement Schedule:

 

Schedule II—Valuation and Qualifying Accounts for the Years Ended January 31, 2016, December 31, 2014 and 2013 
F‐30

 

 

F-1

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of 

KLX Inc. 

Wellington, Florida 

 

We have audited the accompanying consolidated balance sheets of KLX Inc. and subsidiaries (previously the Aerospace Solutions Group and Energy Services Group of B/E Aerospace, Inc. (“B/E”)) (the "Company") as of January 31, 2016 and 2015, and the related consolidated and combined statements of earnings and comprehensive income, stockholders' equity, and cash flows for each of the years ended January 31, 2016, December 31, 2014 and December 31, 2013 and for the one-month transition period ended January 31, 2015. Our audits also include the financial statement schedule listed in the Index at Item 15.  These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. 

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 

 

In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of KLX Inc. and subsidiaries as of January 31, 2016 and 2015, and the results of their operations and their cash flows for the year ended January 31, 2016, each of the two years in the period ended December 31, 2014, and the one-month period ended January 31, 2015, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated and combined financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. 

 

As discussed in Note 1 to the consolidated and combined financial statements, prior to the separation of the Company from B/E, the Company was comprised of the assets and liabilities used in managing and operating the Aerospace Solutions Group and Energy Services Group of B/E. For periods prior to the separation of the Company from B/E, the consolidated and combined financial statements also include allocations from B/E. These allocations may not be reflective of the actual level of assets, liabilities, or costs which would have been incurred had the Company operated as a separate entity apart from B/E. Included in Note 5 to the consolidated and combined financial statements is a summary of transactions with related parties. 

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of January 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 24, 2016, September 8, 2016, as to the effects of the material weakness as described in Management’s Annual Report on Internal Control over Financial Reporting (Revised), which expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness. 

 

/s/ Deloitte & Touche LLP 

Certified Public Accountants 

 

Boca Raton, Florida 

March 24, 2016

F-2

 

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KLX INC.

 

CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31, 2016 AND 2015

 

(In millions)

 

 

 

 

 

 

 

 

 

    

January 31,

    

January 31,

 

 

 

2016 

 

2015 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$
427.8				
 

$
447.2 				
 

Accounts receivable–trade, less allowance for doubtful accounts ($11.3 at January 31, 2016 and $8.0 at January 31, 2015)

 

 
259.6				
 

 
304.2 				
 

Inventories, net

 

 
1,295.3				
 

 
1,322.1 				
 

Other current assets

 

 
40.1				
 

 
51.3 				
 

Total current assets

 

 
2,022.8				
 

 
2,124.8 				
 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation ($109.3 at January 31, 2016 and $67.1 at January 31, 2015)

 

 
260.5				
 

 
333.3 				
 

Goodwill

 

 
954.9				
 

 
1,286.5 				
 

Identifiable intangible assets, net

 

 
262.7				
 

 
457.3 				
 

Deferred income taxes

 

 
163.4				
 

 
0.1 				
 

Other assets

 

 
26.7				
 

 
22.6 				
 

 

 

$
3,691.0				
 

$
4,224.6 				
 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$
145.9				
 

$
142.5 				
 

Deferred acquisition payments

 

 

—

 

 
92.2 				
 

Accrued liabilities

 

 
115.3				
 

 
98.1 				
 

Total current liabilities

 

 
261.2				
 

 
332.8 				
 

 

 

 

 

 

 

 

 

Long-term debt

 

 
1,179.5				
 

 
1,177.2 				
 

Deferred income taxes

 

 
16.2				
 

 
84.8 				
 

Other non-current liabilities

 

 
31.6				
 

 
28.7 				
 

 

 

 

 

 

 

 

 

Commitments, contingencies and off-balance sheet arrangements (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

—

 

 

—

 

Common stock, $0.01 par value; 250.0 million shares authorized; 53.3 million shares issued as of January 31, 2016 and 52.8 million shares issued as of January 31, 2015

 

 
0.5				
 

 
0.5 				
 

Additional paid-in capital

 

 
2,662.4				
 

 
2,644.8 				
 

Treasury stock: 0.4 shares at January 31, 2016 and 0 shares at January 31, 2015

 

 
(12.5)				
 

 

—

 

(Accumulated deficit)/retained earnings

 

 
(373.7)				
 

 
11.3 				
 

Accumulated other comprehensive loss

 

 
(74.2)				
 

 
(55.5)				
 

Total stockholders’ equity

 

 
2,202.5				
 

 
2,601.1 				
 

 

 

$
3,691.0				
 

$
4,224.6 				
 

 

See accompanying notes to consolidated and combined financial statements.

F-3

 

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KLX INC.

 

CONSOLIDATED AND COMBINED STATEMENTS OF EARNINGS AND

 

COMPREHENSIVE INCOME

 

FOR THE YEARS ENDED JANUARY 31, 2016, DECEMBER 31, 2014 AND 2013 AND THE ONE MONTH ENDED JANUARY 31, 2015

 

- (In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Month Ended

 

 

 

January 31, 2016

 

December 31, 2014

 

December 31, 2013

 

January 31, 2015

 

Product revenues

    

$
1,312.5				
    

$
1,310.2				
    

$
1,268.1				
    

$
93.1				
 

Service revenues

 

 
254.9				
 

 
385.5				
 

 
23.5				
 

 
39.9				
 

Total revenues

 

 
1,567.4				
 

 
1,695.7				
 

 
1,291.6				
 

 
133.0				
 

Cost of sales - products

 

 
918.1				
 

 
921.7				
 

 
855.0				
 

 
67.1				
 

Cost of sales - services

 

 
284.3				
 

 
273.2				
 

 
17.8				
 

 
28.5				
 

Total cost of sales

 

 
1,202.4				
 

 
1,194.9				
 

 
872.8				
 

 
95.6				
 

Selling, general and administrative

 

 
261.6				
 

 
254.0				
 

 
180.3				
 

 
19.7				
 

Goodwill impairment charge

 

 
310.4				
 

 

—

 

 

—

 

 

—

 

Long-lived asset impairment charge

 

 
329.8				
 

 

—

 

 

—

 

 

—

 

Operating (loss) earnings

 

 
(536.8)				
 

 
246.8				
 

 
238.5				
 

 
17.7				
 

Interest expense (income)

 

 
77.3				
 

 
3.0				
 

 
(1.0)				
 

 
6.3				
 

(Loss) earnings before income taxes

 

 
(614.1)				
 

 
243.8				
 

 
239.5				
 

 
11.4				
 

Income tax (benefit) expense

 

 
(228.3)				
 

 
155.7				
 

 
89.1				
 

 
4.3				
 

Net (loss) earnings 

 

$
(385.8)				
 

$
88.1				
 

$
150.4				
 

$
7.1				
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 
(18.7)				
 

 
(76.7)				
 

 
18.7				
 

 
(27.0)				
 

Comprehensive (loss) income 

 

$
(404.5)				
 

$
11.4				
 

$
169.1				
 

$
(19.9)				
 

Net (loss) earnings per share - basic

 

$
(7.39)				
 

$
1.69				
 

$
2.88				
 

$
0.14				
 

Net (loss) earnings per share - diluted

 

$
(7.39)				
 

$
1.68				
 

$
2.88				
 

$
0.14				
 

Weighted average common shares - basic

 

 
52.2				
 

 
52.2				
 

 
52.2				
 

 
52.2				
 

Weighted average common shares - diluted

 

 
52.2				
 

 
52.3				
 

 
52.3				
 

 
52.3				
 

 

See accompanying notes to consolidated and combined financial statements.

F-4

 

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KLX INC.

 

CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

FOR THE PERIODS ENDED JANUARY 31, 2016 AND 2015 AND DECEMBER 31, 2014 AND 2013 AND THE ONE MONTH ENDED JANUARY 31, 2015

 

 (In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Former

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Parent

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Paid-in

 

Treasury

 

Company

 

Retained

 

Comprehensive

 

Stockholders’

 

 

    

Shares

    

Amount

    

Capital

    

Stock

    

Investment

    

Earnings

    

Income (Loss)

    

Equity

 

Balance, December 31, 2012

 

  —

 

$

  —

 

$

  —

 

  —

 

$
2,606.0				
 

$

  —

 

$
29.5				
 

$
2,635.5				
 

Net transfers from Former Parent

 

  —

 

 

  —

 

 

  —

 

  —

 

 
(5.9)				
 

 

  —

 

 

  —

 

 
(5.9)				
 

Net earnings

 

  —

 

 

  —

 

 

  —

 

  —

 

 
150.4				
 

 

  —

 

 

  —

 

 
150.4				
 

Net foreign currency translation adjustments

 

  —

 

 

  —

 

 

  —

 

  —

 

 

  —

 

 

  —

 

 
18.7				
 

 
18.7				
 

Balance, December 31, 2013

 

  —

 

 

  —

 

 

  —

 

  —

 

 
2,750.5				
 

 

  —

 

 
48.2				
 

 
2,798.7				
 

Net transfers from Former Parent

 

  —

 

 

  —

 

 

  —

 

  —

 

 
(189.8)				
 

 

  —

 

 

  —

 

 
(189.8)				
 

Net earnings before spin-off

 

  —

 

 

  —

 

 

  —

 

  —

 

 
83.9				
 

 

  —

 

 

  —

 

 
83.9				
 

Net earnings after spin-off

 

  —

 

 

  —

 

 

  —

 

  —

 

 

  —

 

 
4.2				
 

 

  —

 

 
4.2				
 

Consummation of spin-off transaction on December 16, 2014

 
52.5				
 

 
0.5				
 

 
2,644.1				
 

  —

 

 
(2,644.6)				
 

 

  —

 

 

  —

 

 

  —

 

Net foreign currency translation adjustments

 

  —

 

 

  —

 

 

  —

 

  —

 

 

  —

 

 

  —

 

 
(76.7)				
 

 
(76.7)				
 

Balance, December 31, 2014

 
52.5				
 

 
0.5				
 

 
2,644.1				
 

  —

 

 

  —

 

 
4.2				
 

 
(28.5)				
 

 
2,620.3				
 

Stock option expense

 

  —

 

 

  —

 

 
0.2				
 

  —

 

 

  —

 

 

  —

 

 

  —

 

 
0.2				
 

Restricted stock expense, net of forfeitures

 
0.3				
 

 

  —

 

 
0.5				
 

  —

 

 

  —

 

 

  —

 

 

  —

 

 
0.5				
 

Net earnings

 

  —

 

 

  —

 

 

  —

 

  —

 

 

  —

 

 
7.1				
 

 

  —

 

 
7.1				
 

Net foreign currency translation adjustments

 

  —

 

 

  —

 

 

  —

 

  —

 

 

  —

 

 

  —

 

 
(27.0)				
 

 
(27.0)				
 

Balance, January 31, 2015

 
52.8				
 

 
0.5				
 

 
2,644.8				
 

  —

 

 

  —

 

 
11.3				
 

 
(55.5)				
 

 
2,601.1				
 

Sale of stock under employee stock purchase plan

 

  —

 

 

  —

 

 
1.8				
 

  —

 

 

  —

 

 

  —

 

 

  —

 

 
1.8				
 

Return to provision true-up related to pre spin-off and other

 

  —

 

 

  —

 

 
1.0				
 

  —

 

 

  —

 

 

  —

 

 

  —

 

 
1.0				
 

Purchase of treasury stock

 

  —

 

 

  —

 

 

  —

 
(12.5)				
 

 

  —

 

 

  —

 

 

  —

 

 
(12.5)				
 

Restricted stock grants, net of forfeitures and restricted stock unit vesting

 
0.5				
 

 

  —

 

 
14.8				
 

  —

 

 

  —

 

 
0.8				
 

 

  —

 

 
15.6				
 

Net (loss)

 

  —

 

 

  —

 

 

  —

 

  —

 

 

  —

 

 
(385.8)				
 

 

  —

 

 
(385.8)				
 

Net foreign currency translation adjustments

 

  —

 

 

  —

 

 

  —

 

  —

 

 

  —

 

 

  —

 

 
(18.7)				
 

 
(18.7)				
 

Balance, January 31, 2016

 
53.3				
 

$
0.5				
 

$
2,662.4				
 
(12.5)				
 

$

  —

 

$
(373.7)				
 

$
(74.2)				
 

$
2,202.5				
 

 

See accompanying notes to consolidated and combined financial statements.

F-5

 

Table of Contents
KLX INC.

 

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

 

FOR THE YEARS ENDED JANUARY 31, 2016, DECEMBER 31, 2014 AND 2013 AND THE ONE MONTH ENDED JANUARY 31, 2015

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Month Ended

 

 

    

January 31, 2016

    

December 31, 2014

    

December 31, 2013

    

January 31, 2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings 

 

$
(385.8)				
 

$
88.1				
 

$
150.4				
 

$
7.1				
 

Adjustments to reconcile net earnings to net cash flows provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 
75.0				
 

 
68.0				
 

 
27.8				
 

 
7.3				
 

Deferred income taxes 

 

 
(229.3)				
 

 
42.8				
 

 
32.0				
 

 
(0.4)				
 

Asset impairment charge

 

 
640.2				
 

 

  —

 

 

  —

 

 

  —

 

Non-cash compensation

 

 
15.8				
 

 
3.7				
 

 
3.7				
 

 
0.7				
 

Amortization of deferred financing fees

 

 
4.0				
 

 

  —

 

 

  —

 

 
0.3				
 

Excess tax benefit / (loss) realized from prior exercises of restricted stock

 

 
0.2				
 

 
(0.6)				
 

 
(1.2)				
 

 

  —

 

Provision for doubtful accounts

 

 
3.3				
 

 
12.4				
 

 
1.4				
 

 
(0.1)				
 

Loss on disposal of property and equipment

 

 
2.9				
 

 
6.6				
 

 
0.5				
 

 

  —

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 
40.3				
 

 
(83.6)				
 

 
(4.7)				
 

 
1.9				
 

Inventories

 

 
25.7				
 

 
(67.2)				
 

 
(18.9)				
 

 
(34.6)				
 

Other current and non-current assets

 

 
2.7				
 

 
(21.9)				
 

 
(6.7)				
 

 
(2.9)				
 

Accounts payable

 

 
3.4				
 

 
36.7				
 

 
(12.8)				
 

 
(7.2)				
 

Other current and non-current liabilities

 

 
18.8				
 

 
22.5				
 

 
14.1				
 

 
12.8				
 

Net cash flows provided by (used in) operating activities

 

 
217.2				
 

 
107.5				
 

 
185.6				
 

 
(15.1)				
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 
(130.5)				
 

 
(136.8)				
 

 
(29.4)				
 

 
(6.2)				
 

Acquisitions, net of cash acquired

 

 
(4.3)				
 

 
(513.8)				
 

 
(117.5)				
 

 

  -

 

Net cash flows used in investing activities

 

 
(134.8)				
 

 
(650.6)				
 

 
(146.9)				
 

 
(6.2)				
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 
(9.5)				
 

 

  —

 

 

  —

 

 

  —

 

Cash proceeds from stock issuance

 

 
1.5				
 

 

  —

 

 

  —

 

 

  —

 

Proceeds from long-term debt

 

 

  —

 

 
1,200.0				
 

 

  —

 

 

  —

 

Debt origination costs

 

 

  —

 

 
(27.9)				
 

 

—

 

 

  —

 

Excess tax (loss) / benefit realized from prior exercises of restricted stock

 

 
(0.2)				
 

 
0.6				
 

 
1.2				
 

 

  —

 

Net transfers to B/E Aerospace, Inc.

 

 

  —

 

 
(233.3)				
 

 
(0.5)				
 

 

  —

 

Deferred acquisition payments

 

 
(90.9)				
 

 

  —

 

 

  —

 

 

  —

 

Net cash flows (used in) provided by financing activities

 

 
(99.1)				
 

 
939.4				
 

 
0.7				
 

 

  —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 
(2.7)				
 

 
(4.1)				
 

 
2.9				
 

 
(2.3)				
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 
(19.4)				
 

 
392.2				
 

 
42.3				
 

 
(23.6)				
 

Cash and cash equivalents, beginning of period

 

 
447.2				
 

 
78.6				
 

 
36.3				
 

 
470.8				
 

Cash and cash equivalents, end of period

 

$
427.8				
 

$
470.8				
 

$
78.6				
 

$
447.2				
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$
13.2				
 

$
21.1				
 

$
12.2				
 

$
0.6				
 

Interest

 

 
71.0				
 

 

  —

 

 

  —

 

 

  —

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock

 

$
3.0				
 

$

  —

 

$

  —

 

$

  —

 

Contingent consideration

 

 

  —

 

 
92.2				
 

 

  —

 

 

  —

 

 

See accompanying notes to consolidated and combined financial statements.

F-6

 

Table of Contents
KLX INC.

 

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

FOR THE YEARS ENDED JANUARY 31, 2016, DECEMBER 31, 2014 AND 2013 AND THE ONE MONTH ENDED JANUARY 31, 2015

 

(In millions, except share and per share data)

 

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

On December 17, 2014, B/E Aerospace, Inc. (“B/E Aerospace” or “Former Parent”) created an independent public company through a spin‐off of its Aerospace Solutions Group (“ASG”) and Energy Services Group (“ESG”) businesses to Former Parent’s stockholders (“Spin‐Off”). To effect the Spin‐Off, B/E Aerospace distributed 52.5 million shares of KLX Inc. (“KLX” or the “Company”) common stock to B/E Aerospace’s stockholders on December 17, 2014. Holders of B/E Aerospace’s common stock received one share of KLX common stock for every two shares of B/E Aerospace’s common stock held on December 5, 2014. B/E Aerospace structured the distribution to be tax free to its U.S. stockholders for U.S. federal income tax purposes. As a result of the Spin‐Off, KLX now operates as an independent, publicly traded company. Basic and diluted earnings per common share and the average number of common shares outstanding were retrospectively restated for the year ended December 31, 2013 for the number of KLX shares outstanding immediately following the transaction.

 

We believe, based on our experience in the industry, that we are the world’s leading distributor and value‐added service provider of aerospace fasteners and other consumables, offering one of the broadest ranges of aerospace hardware and consumables and inventory management services, selling to essentially every major airline in the world as well as leading maintenance, repair and overhaul (“MRO”) providers, the leading airframe manufacturers and their first and second tier suppliers. The Company also provides technical services and associated rental equipment to land‐based oil and gas exploration and drilling companies often in remote locations.

 

Basis of Presentation

 

On February 24, 2015, the Board of Directors approved a change in the Company’s fiscal year end from December 31 to January 31. This change to the new reporting cycle began February 1, 2015. As a result of the change, the Company is reporting a January 2015 fiscal month transition period.

 

The Company’s consolidated and combined financial statements include KLX and its wholly owned subsidiaries. Prior to the Spin‐Off on December 17, 2014, KLX’s financial statements were derived from B/E Aerospace’s consolidated and combined financial statements and accounting records as if it was operated on a stand‐alone basis and were prepared in accordance with accounting principles generally accepted in the United States (GAAP). All intercompany transactions and account balances within the Company have been eliminated.

 

The consolidated and combined statements of earnings and comprehensive income for the periods prior to the spin-off reflect allocations of general corporate expenses from B/E Aerospace, including, but not limited to, executive management, finance, legal, information technology, human resources, employee benefits administration, treasury, risk management, procurement and other shared services. The allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenues generated, costs incurred, headcount or other measures. Management of the Company considers these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided, to the Company. The allocations may not, however, reflect the expense the Company would have incurred as a stand‐alone company for the periods presented. Actual costs that may have been incurred if the Company had been a stand‐alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.

F-7

 

Table of Contents
 

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

 

Revenue Recognition—Sales of products and services are recorded when the earnings process is complete. This generally occurs when the products are shipped to the customer in accordance with the contract or purchase order, risk of loss and title has passed to the customer, collectability is reasonably assured and pricing is fixed and determinable. In instances where title does not pass to the customer upon shipment, the Company recognizes revenue upon delivery or customer acceptance, depending on the terms of the sales contract.

 

In connection with the sales of its products, the Company 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 the Company contemporaneously with the delivery of the product, and as such, once the product is delivered, the Company 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, the Company has satisfied its obligations to the customer. The Company does 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.

 

Service revenues from oilfield technical services and related rental equipment are recorded when services are performed and/or equipment is rented pursuant to a completed purchase order or master services agreement (“MSA”) that sets forth firm pricing and payment terms.

 

Income Taxes—The Company provides deferred income taxes for temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. Deferred income taxes are computed using enacted tax rates that are expected to be in effect when the temporary differences reverse. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized. The Company records uncertain tax positions within income tax expense and classifies interest and penalties related to income taxes as income tax expense.

 

Cash Equivalents—The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

 

Accounts Receivable, Net—The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. The allowance for doubtful accounts at January 31, 2016 and 2015 was $11.3 and $8.0, respectively.

 

Inventories—Inventories, made up of finished goods, primarily consist 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 regularly 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, costs in inventory include amounts relating to long-term contracts with long production cycles and to inventory items with long production cycles, some of which are not expected to be realized within one year. Reserves for excess and obsolete inventory were approximately $40.4 and $33.5 as of January 31, 2016 and 2015, respectively.

 

Substantially all of our inventory is comprised of aerospace grade fasteners which support OEM production and the aftermarket over the life of the airframe. Inventory with a limited shelf life is continually monitored and reserved for 

F-8

 

Table of Contents
in advance of expiration. The provision for inventory with limited shelf life is relatively insignificant and has not exceeded $0.5 during the past three years.

 

Property and Equipment, Net—Property and equipment are stated at cost and depreciated generally under the straight‐line method over their estimated useful lives of one to fifty years (or the lesser of the term of the lease for leasehold improvements, as appropriate).

 

Goodwill and Intangible Assets, Net—Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other (“ASC 350”), goodwill and indefinite‐lived intangible assets are reviewed at least annually for impairment. Acquired intangible assets with definite lives are amortized over their individual useful lives. Other intangible assets are amortized using the straight‐line method over periods ranging from four to thirty years.

 

As of January 31, 2016, the Company had two reporting units, which were determined based on the guidelines contained in FASB ASC Topic 350, Subtopic 20, Section 35. Each reporting unit constitutes a business, for which there is discrete financial information available that is regularly reviewed by the management of the Company.

 

Goodwill is tested at least annually as of December 31st, and management assesses whether there has been any impairment in the value of goodwill by first comparing the fair value to the net carrying value of the reporting units. If the carrying value exceeds its estimated fair value, a second step is performed to compute the amount of the impairment. An impairment loss is recognized if the implied fair value of the asset being tested is less than its carrying value. In this event, the asset is written down accordingly. The fair values of the reporting units for goodwill impairment testing is determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances.

 

The Company considered the continuing downturn in the oil and gas industry, including the nearly 75% decrease in the number of onshore drilling rigs, and the resulting significant cutbacks in capital expenditures by our oil and gas customers and which has resulted in a decrease in both volume and pricing for oil field services, to be an indicator of impairment of goodwill of the ESG reporting unit. The Company performed the first step of its goodwill impairment analysis as of August 31, 2015 and determined the carrying value of the ESG reporting unit exceeds its fair value.  The Company completed the second step of its goodwill impairment analysis comparing the implied fair value of that reporting unit’s goodwill to the carrying amount of that goodwill and determined goodwill related to the ESG reporting unit was fully impaired and recorded an impairment charge. Accordingly, the Company recorded a pre-tax impairment charge related to ESG’s goodwill of $310.4. For the one month ended January 31, 2015 and the years ended December 31, 2014 and 2013, the Company’s annual impairment testing yielded no impairments of goodwill or the indefinite‐lived intangible asset.

 

The indefinite‐lived intangible asset is tested at least annually for impairment. Impairment for the intangible asset with an indefinite life exists if the carrying value of the intangible asset exceeds its fair value. The fair value of the indefinite‐lived intangible asset is determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances. 

 

Long‐Lived Assets—The Company assesses potential impairments to its long‐lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the asset’s carrying value exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. As a result of the continuing downturn in the oil and gas industry previously mentioned, the Company assessed its ESG asset group’s long-lived assets for impairment and determined the carrying value was not recoverable as of August 31, 2015. The Company used a combination of a cost and market approaches for determining the fair value of the ESG asset group’s long lived assets and recognized impairment charges related to identified intangibles and property and equipment of $177.8 and $152.0, respectively. For the one month ended January 31, 2015 and the years ended December 31, 2014 and 2013, there were no impairments of long lived assets.

 

F-9

 

Table of Contents
Common Stock equivalents—The Company has potential common stock equivalents related to its outstanding restricted stock awards, restricted stock units and employee stock purchase plan. These potential common stock equivalents are not included in diluted loss per share for any period presented in which there is a net loss because the effect would have been anti‐dilutive.

 

Accounting for Stock‐Based Compensation—The Company accounts for share‐based compensation arrangements in accordance with the provisions of FASB ASC 718, Compensation—Stock Compensation (“ASC 718”), 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 two years ended December 31, 2014 and 2013 related to grants of restricted stock and restricted stock units granted by our Former Parent. No compensation cost related to stock options was recognized during those periods as no options were granted during the two year period ended December 31, 2014, and all outstanding options were vested. All unvested shares of restricted stock were converted into unvested shares of KLX on the distribution date at a ratio equal to 1.8139. Compensation cost recognized during the year ended January 31, 2016 (“Fiscal 2015”) and the one month ended January 31, 2015 related to unvested shares converted on the distribution date and new shares of KLX restricted stock and stock options granted during 2015.

 

The Company has established a qualified Employee Stock Purchase Plan. The Employee Stock Purchase Plan allows 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 for 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. The value of the rights under this Plan (and that of our Former Parent’s) granted during the years ended January 31, 2016, December 31, 2014 and 2013 was $0.3, $0.2 and $0.2, respectively, and was not material during the one month ended January 31, 2015.

 

Foreign Currency Translation—The assets and liabilities of subsidiaries located outside the United States are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates. Revenue and expense items are translated at the average exchange rates prevailing during the period. Gains and losses resulting from foreign currency transactions are recognized currently in income, and those resulting from translation of financial statements are accumulated as a separate component of Former Parent company equity and accumulated other comprehensive income (loss). The Company’s European subsidiaries primarily utilize the British pound or the Euro as their local functional currency.

 

Treasury Stock - The Company may periodically repurchase shares of its common stock from employees for the satisfaction of their individual payroll tax withholding upon vesting of restricted stock and restricted stock units in connection with the Company’s Long-Term Incentive Plan (“LTIP”). The Company’s repurchases of common stock are recorded at the average cost of the common stock. As part of the LTIP, the Company repurchased 32,122 shares of its common stock for $1.0 during the year ended January 31, 2016. On January 7, 2016, the Board of Directors authorized a $100.0 share repurchase under the existing $250.0 share repurchase program. During Fiscal 2015, the Company repurchased 416,200 shares of common stock at an average price of $27.48 per share for a total of $11.4.

 

Concentration of Risk—The Company’s products and services are primarily concentrated within the aerospace industry with customers consisting primarily of commercial airlines, a wide variety of business jet customers and commercial aircraft manufacturers. The Company’s management performs ongoing credit evaluations on the financial condition of all of its customers and maintains allowances for uncollectible accounts receivable based on expected collectability. Credit losses have historically been within management’s expectations and the provisions established.

 

Significant customers change from year to year, in the case of ASG, depending on the level of refurbishment activity and/or the level of new aircraft purchases by such customers, and in the case of ESG, depending on the level of exploration and production activity and the use of our services. During the years ended January 31, 2016 and December 31, 2014, no single customer accounted for more than 10% of the Company’s consolidated revenues. During the year ended December 31, 2013, two customers accounted for approximately 10% each of the Company’s combined revenues. 

F-10

 

Table of Contents
No other individual customers accounted for more than 10% of the Company’s combined revenues during the year ended December 31, 2013.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires all leases to be recognized in the statement of financial position. The provisions of ASU 2016-02 are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of this ASU are to be applied using a modified retrospective approach. The Company is currently evaluating the effect that this ASU will have on its consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740). ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective either prospectively or retrospectively for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has elected to early adopt ASU 2015-17 as of January 31, 2016 and retrospectively applied ASU 2015-17 to all periods presented. As of January 31, 2015 the Company reclassified $37.1 million of deferred tax assets from current assets to the noncurrent liability section of the consolidated balance sheets.

 

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years and interim periods beginning after December 15, 2015. The adoption of ASU 2015-16 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In July 2015, FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory measured using last-in, first-out (“LIFO”) or the retail inventory method are excluded from the scope of this update which is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU 2015-11 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In April 2015, FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which updated the guidance in ASC Topic 835, Interest. In August 2015, FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies the guidance in ASU 2015-03 regarding presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The updated guidance is effective retrospectively for annual periods and interim periods within the annual periods beginning after December 15, 2015. Early adoption is permitted, including early adoption in an interim period. The amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The Company adopted these ASUs effective January 31, 2016 and has presented debt issuance costs related to its 5.875% senior unsecured notes of $20.5 and $22.8 as of January 31, 2016 and January 31, 2015, respectively, as a direct deduction from the carrying amounts of its debt liabilities. The January 31, 2015 amount was previously recorded in other assets.

 

In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation, which updated the guidance in ASC Topic 718, Compensation – Stock Compensation (“ASC Topic 718”). The update is effective for 

F-11

 

Table of Contents
annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. ASU 2014-12 brings consistency to the accounting for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. The guidance permits two implementation approaches, either prospectively to all awards granted or modified after the effective date, or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s 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. The Company is currently evaluating the impact this guidance will have on its consolidated financial condition, results of operations, cash flows and disclosures and is currently unable to estimate the impact of adopting this guidance.

 

2. BUSINESS COMBINATIONS

 

During 2013, the Company acquired the assets of Blue Dot Energy Services, LLC (“Blue Dot”) and Bulldog Frac Rentals, LLC (“Bulldog”) (the “2013 Acquisitions”), providers of parts distribution, rental equipment and on‐site services to the oil and gas industry, for a net purchase price of $114.0. The excess of the purchase price over the fair value of the identifiable assets acquired approximated $70.6, of which $33.2 was allocated to identified intangible assets, consisting of customer contracts and relationships and covenants not to compete, and $37.4 was included in goodwill. The useful life assigned to the customer contracts and relationships was 20 years, and the covenants not to compete were being amortized over their contractual periods of five years. The customer contracts and relationships and the covenants not to compete were both impaired and fully written off during the third quarter of 2015. See Note 4 for a discussion of the asset impairment charge.

 

In January 2014, the Company acquired the assets of the LT Energy Services group of companies ("LT"), an Eagle Ford Shale provider of rental equipment, for a net purchase price of approximately $102.5. In February 2014, the Company acquired the assets of Wildcat Wireline LLC ("Wildcat"), a provider of wireline services primarily in the Eagle Ford Shale and also in the Marcellus/Utica Shales, for a net purchase price of approximately $153.4. In April 2014, the Company acquired the assets of the Vision Oil Tools, LLC group of companies ("Vision"), a provider of technical services and associated rental equipment to the energy sector. Vision established a new geographical base of operations for the Company in the North Dakota (Williston/Bakken) and Rocky Mountain regions. The total purchase price was $175.7, which included a deferred payment of $35.0, which was paid during the first quarter of Fiscal 2015 based on the achievement of 2014 financial results. In April 2014, the Company acquired the assets of the Marcellus Gasfield Services group of companies ("MGS") engaged in manufacturing and rental of equipment in the Marcellus/Utica Shales for approximately $44.0. During June 2014, the Company acquired the assets of the Cornell Solutions group of companies ("Cornell"), which provides technical services and rental equipment to the energy sector in the Eagle Ford Shale and Permian Basin. The total purchase price was $128.2, which included a deferred payment of $56.0, which was paid during the first quarter of Fiscal 2015 based on the achievement of 2014 financial results. These acquisitions are referred to collectively as the "2014 Acquisitions". 

 

For the 2014 Acquisitions, the excess of the purchase price over the fair value of the identifiable assets acquired approximated $431.3, of which $162.0 was allocated to identified intangible assets, consisting of customer contracts and relationships and covenants not to compete, and $269.3 was included in goodwill. The useful life assigned to the customer contracts and relationships was 20 years, and the covenants not to compete were being amortized over their 

F-12

 

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contractual periods of five years. The customer contracts and relationships and the covenants not to compete were both impaired and fully written off during the third quarter of 2015. See Note 4 for a discussion of the asset impairment charge. 

 

The 2014 and 2013 Acquisitions were accounted for as purchases under FASB ASC 805, Business Combinations (“ASC 805”). The assets purchased and liabilities assumed for the 2014 and 2013 Acquisitions have been reflected in the accompanying consolidated balance sheets as of January 31, 2016 and January 31, 2015, and the results of operations for the 2014 and 2013 Acquisitions are included in the accompanying consolidated and combined statements of earnings from the respective dates of acquisition.

 

The following table summarizes the current estimates of fair values of assets acquired and liabilities assumed in the 2014 and 2013 Acquisitions in accordance with ASC 805 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

Total

 

Total

 

 

    

Wildcat

    

Vision

    

Cornell

    

Acquisitions

    

2014

    

2013

 

Accounts receivable-trade

 

$
0.4				
 

$
10.8				
 

$
10.5				
 

$
15.1				
 

$
36.8				
 

$
14.8				
 

Inventories

 

 
1.3				
 

 

—

 

 

—

 

 
0.4				
 

 
1.7				
 

 
3.9				
 

Other current and non-current assets

 

 

—

 

 
2.4				
 

 

—

 

 
0.1				
 

 
2.5				
 

 
0.2				
 

Property and equipment

 

 
30.3				
 

 
44.1				
 

 
28.5				
 

 
40.5				
 

 
143.4				
 

 
35.5				
 

Goodwill

 

 
83.7				
 

 
69.8				
 

 
57.5				
 

 
58.3				
 

 
269.3				
 

 
37.4				
 

Identified intangibles

 

 
37.7				
 

 
50.1				
 

 
33.6				
 

 
40.6				
 

 
162.0				
 

 
33.2				
 

Accounts payable

 

 

—

 

 
(1.5)				
 

 
(0.7)				
 

 
(4.3)				
 

 
(6.5)				
 

 
(10.0)				
 

Other current and non-current liabilities

 

 

—

 

 
(35.0)				
 

 
(57.2)				
 

 
(4.2)				
 

 
(96.4)				
 

 
(1.0)				
 

Total consideration paid

 

$
153.4				
 

$
140.7				
 

$
72.2				
 

$
146.5				
 

$
512.8				
 

$
114.0				
 

 

The majority of the goodwill and other intangible assets related to the 2014 and 2013 Acquisitions is expected to be deductible for tax purposes. 

 

The amount of 2013 Acquisitions and 2014 Acquisitions revenues and net earnings included in the Company’s results for the years ended December 31, 2014 and December 31, 2013 were $385.5 and $34.9 and $23.5 and $(1.1), respectively.

 

On a pro forma basis to give effect to the 2013 and 2014 Acquisitions as if they occurred on January 1, 2014, revenues and net earnings for the years ended December 31, 2014 and December 31, 2013 would have been as follows:

 

 

 

 

 

 

 

 

 

 

 

UNAUDITED

 

 

 

YEAR ENDED

 

 

    

December 31, 2014

    

December 31, 2013

 

 

 

Pro forma

 

Pro forma

 

Revenues

 

$
1,763.2				
 

$
1,587.3				
 

Net earnings(1)

 

 
100.5				
 

 
178.8				
 

Earnings per diluted share(1)

 

 
1.92				
 

 
3.42				
 

(1)    2014 includes $56.9 of non‐recurring costs and $67.3 of non-recurring exit taxes; 2013 includes $24.2 of non‐recurring costs.

 

F-13

 

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3. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Useful

    

January 31,

    

January 31,

 

 

 

Life (Years)

 

2016

 

2015

 

Land, buildings and improvements

 
3				
-
50				
 

$
35.5				
 

$
30.2				
 

Machinery

 
2				
-
20				
 

 
89.5				
 

 
192.4				
 

Computer equipment and software

 
1				
-
15				
 

 
96.1				
 

 
68.2				
 

Furniture and equipment

 
1				
-
14				
 

 
148.7				
 

 
109.6				
 

 

 

 

 

 

 

 
369.8				
 

 
400.4				
 

Less accumulated depreciation

 

 

 

 

 

 
109.3				
 

 
67.1				
 

 

 

 

 

 

 

$
260.5				
 

$
333.3				
 

 

Depreciation expense was $51.3, $37.4, $7.9 and $4.5 for the years ended January 31, 2016, December 31, 2014 and 2013 and the one month ended January 31, 2015, respectively.

 

4. GOODWILL AND LONG-LIVED ASSETS, NET

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2016

 

January 31, 2015

 

 

 

UsefulLife

    

Original

    

Accumulated

    

Impairment

    

Net Book

    

Original

    

Accumulated

    

Net Book

 

 

 

(Years)

 

Cost

 

Amortization

 

Charge

 

Value

 

Cost

 

Amortization

 

Value

 

Customer contracts and relationships

 
8 				
-
30 				
 

$
536.9				
 

$
124.2				
 

$
167.1				
 

$
245.6				
 

$
531.0				
 

$
102.1				
 

$
428.9				
 

Covenants not to compete 

 
4 				
-
5 				
 

 
18.2				
 

 
7.4				
 

 
10.7				
 

 
0.1				
 

 
17.2				
 

 
6.5				
 

 
10.7				
 

Trade names

 

Indefinite

 

 
17.0				
 

 

—

 

 

—

 

 
17.0				
 

 
17.7				
 

 

—

 

 
17.7				
 

 

 

 

 

 

 

$
572.1				
 

$
131.6				
 

$
177.8				
 

$
262.7				
 

$
565.9				
 

$
108.6				
 

$
457.3				
 

 

Amortization expense of intangible assets was $23.7, $30.5, $19.9 and $2.8 for the years ended January 31, 2016, December 31, 2014 and 2013 and the one month ended January 31, 2015, respectively. Amortization expense is expected to be approximately $15.0 in each of the next five years.

 

In accordance with ASC 350, goodwill is not amortized but is subject to an annual impairment test. The continued downturn in the oil and gas industry, including the nearly 75% decrease in the number of onshore drilling rigs and the resulting significant cutbacks in the capital expenditures of our customers, represented a significant adverse change in the business climate, which indicated that the ESG reporting unit’s goodwill was impaired and ESG asset group’s long-lived assets may not be recoverable. As a result, during the third quarter ended October 31, 2015, the Company performed an interim goodwill impairment test and a long-lived asset recoverability test. The results of the goodwill impairment testing indicated that goodwill was impaired which resulted in a $310.4 goodwill impairment charge for the year ended January 31, 2016. 

 

Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are tested for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the asset’s carrying value exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. Based on the impairment indicators above, we performed a long-lived asset impairment analysis and concluded the carrying amount of the long-lived assets exceeded the undiscounted 

F-14

 

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cash flows of the ESG asset group. As a result, we recorded a $329.8 long-lived asset impairment charge, $177.8 related to identified intangible assets and $152.0 related to property and equipment for the year ended January 31, 2016. 

 

The charges reflect the full value of the goodwill and identified intangible assets attributable to the ESG segment. The accumulated goodwill impairment losses (incurred in 2008 and 2015) totaled $601.1 as of January 31, 2016.

 

The changes in the carrying amount of goodwill for the years ended January 31, 2016 and December 31, 2014 and the one month ended January 31, 2015 are as follows:

 

 

 

 

 

 

Balance, December 31, 2013

    

$
1,069.8				
 

Acquisitions

 

 
296.6				
 

Effect of foreign currency translation

 

 
(37.7)				
 

Balance, December 31, 2014

 

 
1,328.7				
 

Purchase Price Adjustments

 

 
(21.7)				
 

Effect of foreign currency translation

 

 
(20.5)				
 

Balance, January 31, 2015

 

 
1,286.5				
 

Acquisitions

 

 
2.5				
 

Purchase Price Adjustments

 

 
(10.3)				
 

Effect of foreign currency translation

 

 
(13.4)				
 

Impairment

 

 
(310.4)				
 

Balance, January 31, 2016

 

$
954.9				
 

 

5. RELATED PARTY TRANSACTIONS

 

The consolidated and combined statements of earnings and comprehensive income for the two years ended December 31, 2014 include an allocation of general corporate expenses from B/E Aerospace. These costs were allocated to the Company on a systematic and reasonable basis utilizing a direct usage basis when identifiable, with the remainder allocated on the basis of costs incurred, headcount or other measures.

 

Allocations for general corporate expenses, including management costs and corporate support services provided to the Company, totaled $31.7 and $33.6 for fiscal year 2014 and 2013, respectively. These amounts include costs for functions including executive management, finance, legal, information technology, human resources, employee benefits administration, treasury, risk management, procurement and other shared services.

 

In connection with the Spin‐off, we have created some of the functions that were previously provided to us through corporate allocations from B/E Aerospace in‐house. In addition, we have entered into certain agreements with B/E Aerospace relating to transition services and IT services for a transitional period of approximately 24 months following the distribution. In addition, we entered into an employee matters agreement and a tax sharing and indemnification agreement with B/E Aerospace in connection with the Spin‐off. This transitional support will enable KLX Inc. to establish its stand‐alone processes for various activities that were previously provided by B/E Aerospace and does not constitute significant continuing support of KLX Inc.’s operations. Expenses incurred under those agreements totaled $9.6 for the year ended January 31, 2016.

 

Sales to B/E Aerospace for the years ended January 31, 2016, December 31, 2014 and 2013 and the one month ended January 31, 2015 were $19.0, $16.2, $13.6 and $1.5, respectively.

 

F-15

 

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6. ACCRUED LIABILITIES

 

Accrued liabilities consist of the following:

 

 

 

 

 

 

 

 

 

 

    

January 31, 2016

    

January 31, 2015

 

Accrued salaries, vacation and related benefits

 

$
28.7				
 

$
14.9				
 

Accrued commissions

 

 
6.2				
 

 
5.3				
 

Income taxes payable

 

 
11.4				
 

 
23.3				
 

Accrued interest

 

 
11.7				
 

 
9.0				
 

Other accrued taxes 

 

 
2.8				
 

 
6.9				
 

Accrued legal fees

 

 
6.5				
 

 

  -

 

Other accrued liabilities

 

 
48.0				
 

 
38.7				
 

 

 

$
115.3				
 

$
98.1				
 

 

7. LONG‐TERM DEBT

 

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

    

January 31, 2016

    

January 31, 2015

 

Senior unsecured notes

 

$
1,200.0				
 

$
1,200.0				
 

Less unamortized original issue discount and debt issue costs

 

 
20.5				
 

 
22.8				
 

 

 

$
1,179.5				
 

$
1,177.2				
 

 

In December 2014, in connection with the Spin‐off, the Company issued $1,200.0 aggregate principal amount of 5.875% senior unsecured notes due 2022 (the “5.875% Notes”), in an offering pursuant to the Securities Act of 1933, as amended. The net proceeds from the issuance of the 5.875% Notes were approximately $1,172.1, of which $750.0 was distributed to Former Parent, leaving KLX with net proceeds of approximately $422.1. The 5.875% Notes are senior unsecured debt obligations of the Company. We also entered into a $750.0 secured revolving credit facility dated as of December 16, 2014 and amended May 19, 2015 (the “Revolving Credit Facility”). As of January 31, 2016 and December 31, 2014, long‐term debt consisted of $1,200.0 of our 5.875% Notes.

 

Letters of credit outstanding under the Revolving Credit Facility aggregated $3.3 at January 31, 2016.

 

The Revolving Credit Facility is tied to a borrowing base formula and has no financial covenants. The Revolving Credit Facility bears interest at an annual rate equal to the London interbank offered rate (“LIBOR”) plus the applicable margin (as defined), and expires in May 2020. No amounts were outstanding under the Revolving Credit Facility as of January 31, 2016.

 

Maturities of long‐term debt are as follows:

 

 

 

 

 

 

Year Ending January 31,

    

 

 

 

2017

 

$

  —

 

2018

 

 

  —

 

2019

 

 

  —

 

2020

 

 

  —

 

2021

 

 

  —

 

Thereafter

 

 
1,200.0				
 

Total

 

$
1,200.0				
 

 

Interest expense amounted to $77.7, $3.3, $0.0 and $6.3 for the years ended January 31, 2016, December 31, 2014 and 2013 and the one month ended January 31, 2015, respectively.

 

F-16

 

Table of Contents
8. 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 consolidated and combined balance sheets. At January 31, 2016, future minimum lease payments under these arrangements approximated $87.0, of which $83.1 is related to long‐term real estate leases.

 

Rent expense for the years ended January 31, 2016, December 31, 2014 and 2013 was $37.7, $26.4 and $20.6, respectively. Future payments under operating leases with terms greater than one year as of January 31, 2016 are as follows:

 

 

 

 

 

 

Year Ending January 31,

    

 

 

 

2017

 

$
19.6				
 

2018

 

 
16.0				
 

2019

 

 
12.0				
 

2020

 

 
9.9				
 

2021

 

 
10.8				
 

Thereafter

 

 
18.7				
 

Total

 

$
87.0				
 

 

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

 

On January 6, 2016, a putative class action complaint was filed against us and certain of our executive officers and directors in the United States District Court for the Southern District of Florida. The named plaintiff seeks to represent a class of purchasers of our common stock during the period from March 9, 2015 to November 11, 2015. The complaint alleges violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, as well as, in the case of the individual defendants, the control person provisions of the Exchange Act. The complaint principally alleges that the defendants knowingly made incorrect statements regarding the value of the identifiable intangible assets and goodwill associated with ESG prior to the impairment of such assets during the third quarter of 2015. The complaint seeks unspecified damages, interest and attorneys' fees. We believe the claims are without merit and intend vigorously to defend ourselves against them, including by promptly seeking dismissal of the complaint.

 

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 and combined financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.

 

The Company has employment agreements with three year initial terms, which renew for one additional year on each anniversary date, with certain key members of management. 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 and for the Company to reimburse such officers for the amount of any excise taxes associated with such benefits.

 

F-17

 

Table of Contents
9. INCOME TAXES

 

Income taxes as presented are calculated on a separate tax return basis. The Company determined the provision for income taxes using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities.

 

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, the Company looked to the future reversal of existing taxable temporary differences, taxable income in carryback years and the feasibility of tax planning strategies and estimated future taxable income. The need for a valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates.

 

The Company recognizes tax benefits from uncertain tax positions 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. The tax benefits recognized in the consolidated and combined financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

 

As of January 31, 2016, the Company has recorded a tax indemnity payable to B/E Aerospace totaling $6.5, of which $1.9 is classified in other current liabilities and $4.6 is classified in other long‐term liabilities.

 

F-18

 

Table of Contents
Components of (loss) earnings before incomes taxes were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Month Ended

 

 

    

January 31, 2016

    

December 31, 2014

    

December 31, 2013

    

January 31, 2015

 

(Loss) earnings before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$
(624.4)				
 

$
210.9				
 

$
197.5				
 

$
11.3				
 

Foreign

 

 
10.3				
 

 
32.9				
 

 
42.0				
 

 
0.1				
 

(Loss) earnings before income taxes

 

$
(614.1)				
 

$
243.8				
 

$
239.5				
 

$
11.4				
 

 

Income tax (benefit) expense consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Month Ended

 

 

    

January 31, 2016

    

December 31, 2014

    

December 31, 2013

    

January 31, 2015

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$
0.7				
 

$
75.4				
 

$
41.1				
 

$
3.5				
 

State

 

 
(1.5)				
 

 
8.5				
 

 
5.8				
 

 
0.4				
 

Foreign

 

 
3.8				
 

 
29.0				
 

 
10.3				
 

 
0.8				
 

 

 

 
3.0				
 

 
112.9				
 

 
57.2				
 

 
4.7				
 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 
(213.3)				
 

 
42.8				
 

 
28.9				
 

 

  —

 

State

 

 
(17.4)				
 

 
3.5				
 

 
2.4				
 

 

  —

 

Foreign

 

 
(0.6)				
 

 
(3.5)				
 

 
0.6				
 

 
(0.4)				
 

 

 

 
(231.3)				
 

 
42.8				
 

 
31.9				
 

 
(0.4)				
 

Total income tax (benefit) expense

 

$
(228.3)				
 

$
155.7				
 

$
89.1				
 

$
4.3				
 

 

The difference between income tax (benefit) expense and the amount computed by applying the statutory U.S. federal income tax rate (35%) to the pre‐tax earnings consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Month Ended

 

 

    

January 31, 2016

    

December 31, 2014

    

December 31, 2013

    

January 31, 2015

 

Statutory federal income tax (benefit) expense

 

$
(214.9)				
 

$
85.3				
 

$
83.7				
 

$
4.0				
 

U.S. state income taxes

 

 
(17.8)				
 

 
6.0				
 

 
5.9				
 

 
0.3				
 

Foreign tax rate differential

 

 
2.8				
 

 
(3.7)				
 

 
(4.7)				
 

 
0.8				
 

Non-deductible charges/losses and other

 

 
1.6				
 

 
0.8				
 

 
4.2				
 

 
(0.8)				
 

Exit taxes

 

 

  —

 

 
67.3				
 

 

  —

 

 

  —

 

 

 

$
(228.3)				
 

$
155.7				
 

$
89.1				
 

$
4.3				
 

 

Included in the income tax (benefit) expense for the years ended January 31, 2016, December 31, 2014 December 31, 2013 and the one month ended January 31, 2015, respectively, are changes in the valuation allowance of $7.1, $12.0, $1.4 and $0.0.

 

F-19

 

Table of Contents
The tax effects of temporary differences and carryforwards that give rise to deferred income tax assets and liabilities consist of the following:

 

 

 

 

 

 

 

 

 

 

    

January 31, 2016

    

January 31, 2015

 

Deferred tax assets:

 

 

 

 

 

 

 

Inventory reserves

 

$
15.4				
 

$
12.8				
 

Accrued liabilities

 

 
15.7				
 

 
11.7				
 

Intangible Assets

 

 
84.2				
 

 

  —

 

Net operating loss carryforward

 

 
59.5				
 

 
24.8				
 

Inventory capitalization

 

 
10.7				
 

 
10.5				
 

Other

 

 
5.2				
 

 
10.4				
 

 

 

$
190.7				
 

$
70.2				
 

Deferred tax liabilities:

 

 

 

 

 

 

 

Intangible assets

 

 
(16.1)				
 

 
(72.9)				
 

Depreciation

 

 
(5.5)				
 

 
(57.2)				
 

 

 

 
(21.6)				
 

 
(130.1)				
 

Net deferred tax asset (liability) before valuation allowance

 

 
169.1				
 

 
(59.9)				
 

Valuation allowance

 

 
(21.9)				
 

 
(24.8)				
 

Net deferred tax liability

 

$
147.2				
 

$
(84.7)				
 

 

A reconciliation of the beginning and ending amounts of gross uncertain tax positions is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

January 31, 2016

    

January 31, 2015

    

December 31, 2014

 

Unrecognized tax benefit at beginning of period

 

$
9.4				
 

$
10.1				
 

$
1.7				
 

Additions for current year tax positions

 

 

  —

 

 

  —

 

 
8.6				
 

Currency fluctuations

 

 
(0.4)				
 

 
(0.7)				
 

 
(0.2)				
 

Unrecognized tax benefit at end of period

 

$
9.0				
 

$
9.4				
 

$
10.1				
 

 

Included in the balance of unrecognized tax benefits as of January 31, 2016 and 2015 and December 31, 2014 are $9.0, $9.4 and $10.1, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

 

The Company does not anticipate that the total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statutes of limitation within twelve months of this reporting date. The Company classifies interest and penalties related to income tax as income tax expense. The amount included in the Company’s liability for unrecognized tax benefits for interest and penalties was immaterial as of January 31, 2016, January 31, 2015 and December 31, 2014.

 

The Company is subject to taxation in the United States, various states and foreign jurisdictions. The Company has significant operations in the United States, the United Kingdom, France and Germany. Tax years that remain subject to examinations by major tax jurisdictions vary by legal entity but are generally open outside the U.S. for the tax years ending after 2009.

 

The Company has federal and state net operating loss carryforwards of $98.2 and $63.7, respectively, as of January 31, 2016. The Company has $82.7 of foreign net operating loss carryforwards as of January 31, 2016 for which a valuation allowance of $81.3 has been recognized. The Company’s future tax provision will reflect any favorable or unfavorable adjustments to its estimated tax liabilities when resolved. The Company is unable to predict the outcome of these matters. However, the Company believes that none of these matters will have a material effect on the results of operations or financial condition of the Company.

 

Undistributed earnings of certain of the Company’s foreign subsidiaries amounted to $45.9 at January 31, 2016. Those earnings are considered to be permanently reinvested and no provision for U.S. federal and state income taxes has been made. Distribution of these earnings in the form of dividends or otherwise could result in U.S. federal taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable in various foreign countries. It is not currently 

F-20

 

Table of Contents
practical to determine the amount of U.S. income and foreign withholding tax payable in the event all such foreign earnings are repatriated.

 

The Company’s effective tax rate can fluctuate as operations and the local country tax rates fluctuate due to the number of tax jurisdictions in which the Company operates.

 

Under the tax sharing and indemnity agreement between the Company and B/E Aerospace, B/E Aerospace generally assumes liability for all federal and state income taxes for all tax periods ending on or prior to December 31, 2014. B/E Aerospace assumes the liability for all federal and state income taxes of KLX’s U.S. operations through the distribution date. KLX assumes all other federal taxes, foreign income tax/non‐income taxes and state/local non‐income taxes related to its business for all periods and B/E Aerospace assumes all other federal taxes, foreign income tax/non‐income taxes and state/local non‐income taxes related to their business for all periods. Additional taxes incurred related to the internal restructuring to separate the businesses to complete the spin‐off shall be shared equally between B/E Aerospace and KLX. Taxes incurred related to certain international tax initiatives for the KLX business shall be assumed by KLX subject to the calculation provisions of the tax sharing and indemnity agreement. In addition, B/E Aerospace transferred to KLX all the deferred tax assets and liabilities related to the KLX business as of December 16, 2014.

 

10. EMPLOYEE RETIREMENT PLANS

 

B/E Aerospace sponsored and contributes to a qualified, defined contribution savings and investment plan, covering substantially all U.S. employees, including current KLX employees that transferred to KLX from B/E Aerospace. Balances related to the Company employees’ participation in B/E Aerospace’s plans were determined by specifically identifying the balances for the Company’s participants. The B/E Aerospace, Inc. Savings Plan was established pursuant to Section 401(k) of the Internal Revenue Code. Under the terms of this plan, covered employees could contribute up to 100% of their pay, limited to certain statutory maximum contributions for 2014 and 2013. Participants are vested in matching contributions immediately and the matching percentage is 100% of the first 3% of employee contributions and 50% on the next 2% of employee contributions. Total expense for the plan was $3.6, $2.8, $1.6 and $0.4 for the years ended January 31, 2016, December 31, 2014 and 2013 and the one month ended January 31, 2015, respectively. B/E Aerospace also sponsored and contributed to a supplemental executive retirement plan (“SERP”), which was established pursuant to Section 409A of the Internal Revenue Code, for certain B/E Aerospace and Company employees. The SERP is an unfunded plan maintained for the purpose of providing deferred compensation for certain employees. This plan allows certain employees to annually elect to defer a portion of their compensation, on a pre‐tax basis, until their retirement. The retirement benefit to be provided is based on the amount of compensation deferred. The Former Parent made cash matching contributions and earnings on deferrals at various levels, which varies by position. Compensation expense under this program was $2.4, $0.1 and $0.2 for the years ended January 31, 2016, December 31, 2014 and 2013, respectively. Compensation expense was immaterial under this program for the one month ended January 31, 2015. The Company and its subsidiaries participate in government‐sponsored programs in certain foreign countries. The Company funds these plans based on legal requirements, tax considerations, local practices and investment opportunities. Upon the Spin‐off, the Company adopted employee retirement plans substantially similar to those of the B/E Aerospace.

 

11. STOCKHOLDERS’ EQUITY

 

Earnings Per Share—Basic net earnings per common share is computed using the weighted average of common shares outstanding during the year. Diluted net earnings per common share reflects the potential dilution from assumed conversion of all dilutive securities such as stock options and unvested restricted stock using the treasury stock method. When the effects of the outstanding stock options, restricted stock awards or restricted stock units are anti‐dilutive, they are not included in the calculation of diluted earnings per common share. For the years ended January 31, 2016, December 31, 2014 and 2013 and the one month ended January 31, 2015, no shares and approximately 0.1, 0.1 and 0.1 million shares, respectively, were excluded from the determination of diluted earnings per common share because the effect would have been anti‐dilutive.

 

F-21

 

Table of Contents
The following table sets forth the computation of basic and diluted net earnings per share for the years ended January 31, 2016, December 31, 2014 and 2013 and the one month ended January 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Month Ended

 

 

    

January 31, 2016

    

December 31, 2014

    

December 31, 2013

    

January 31, 2015

 

Numerator: net (loss) earnings

 

$
(385.8)				
 

$
88.1				
 

$
150.4				
 

$
7.1				
 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share—Weighted average shares (in millions)

 

 
52.2				
 

 
52.2				
 

 
52.2				
 

 
52.2				
 

Effect of dilutive securities—Dilutive securities (in millions)

 

 

  —

 

 
0.1				
 

 
0.1				
 

 
0.1				
 

Denominator for diluted earnings per share—Adjusted weighted average shares (in millions)

 

 
52.2				
 

 
52.3				
 

 
52.3				
 

 
52.3				
 

Basic net (loss) earnings per share(1)

 

$
(7.39)				
 

$
1.69				
 

$
2.88				
 

$
0.14				
 

Diluted net (loss) earnings per share(1)

 

$
(7.39)				
 

$
1.68				
 

$
2.88				
 

$
0.14				
 

 

 (1)

On December 16, 2014, the distribution date, B/E Aerospace stockholders of record as of the close of business on December 5, 2014 received one share of KLX common stock for every two shares of B/E Aerospace’s common stock held as of the record date. Basic and diluted earnings per common share and the average number of common shares outstanding were calculated using the number of KLX common shares outstanding immediately following the distribution.

 

Long‐Term Incentive Plan—B/E Aerospace has a Long‐Term Incentive Plan (“LTIP”) under which the Former Parent’s Compensation Committee may grant stock options, stock appreciation rights, restricted stock, restricted stock units or other forms of equity based or equity related awards. KLX adopted an LTIP similar to the Former Parent’s upon the Spin‐off, and unvested shares in the Former Parent were transferred with the employees to KLX on the same terms and conditions on an exchange ratio of 1.8139 such that the impact was neutral to employees at the date of the Spin‐off.

 

During 2014, 2013 and 2012, B/E Aerospace granted restricted stock under the LTIP to certain members of the Company’s management. Restricted stock grants vest over four years and are granted at the discretion of the Compensation Committee of the B/E Aerospace’s Board of Directors. Certain awards also vest upon attainment of performance goals. Compensation cost is recorded on a straight‐line basis over the vesting term of the shares based on the grant date value using the closing trading price. Share based compensation of $11.4, $3.5, $3.5 and $0.5 was recorded during fiscal year 2015, 2014 and 2013 and the one month ended January 31, 2015, respectively. Unrecognized compensation cost related to these grants was $36.6 at January 31, 2016.

 

F-22

 

Table of Contents
The following table summarizes shares of restricted stock that were granted, vested, forfeited and outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2016

 

January 31, 2015

 

 

    

 

    

 

    

Weighted

    

 

    

 

 

    

Weighted

 

 

 

 

 

Weighted

 

Average

 

 

 

Weighted

 

Average

 

 

 

 

 

Average

 

Remaining

 

 

 

Average

 

Remaining

 

 

 

Shares

 

Grant Date

 

Vesting Period

 

Shares

 

Grant Date

 

Vesting Period

 

 

 

(in thousands)

 

Fair Value

 

(in years)

 

(in thousands)

 

Fair Value

 

(in years)

 

Outstanding, beginning of period

 
559.2				
 

$
38.09				
 
2.97				
 
275.5				
 

$
37.21				
 
2.49				
 

Shares granted

 
497.8				
 

 
33.42				
 

 

 
288.6				
 

 
39.08				
 

 

 

Shares vested

 
(171.4)				
 

 
34.65				
 

 

 

  —

 

 

  —

 

 

 

Shares forfeited

 
(58.4)				
 

 
38.56				
 

 

 
(4.9)				
 

 
47.16				
 

 

 

Outstanding, end of period

 
827.2				
 

$
35.96				
 
3.12				
 
559.2				
 

$
38.09				
 
2.97				
 

 

Our stock options are eligible to vest over three years in three equal annual installments, subject to continued employment on each vesting date. Vested options are exercisable at any time until 10 years from the date of the option grant, subject to earlier expirations under certain terminations of service and other conditions. The stock options granted have an exercise price equal to the closing stock price of our common stock on the grant date.

 

At January 31, 2016 and January 31, 2015, we have outstanding 596,598 and 894,899 unvested time-based stock options, respectively, under the KLX Inc. Long-Term Incentive Plan (the “Plan”), which stock options vest on the basis of continuous employment. All of the time-based options vest ratably during the period of service.

 

The following table sets forth the summary of options activity under the Plan (dollars in thousands except per share data):

 

 

 

January 31, 2016

 

January 31, 2015

 

 

    

 

    

 

 

    

Weighted

    

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Average

 

Remaining

 

 

Aggregate

 

 

 

Number

 

Exercise

 

Contractual Life

 

Intrinsic

 

Number

 

Exercise

 

Contractual Life

 

 

Intrinsic

 

 

 

of Shares

 

Price

 

(in years)

 

Value (1)

 

of Shares

 

Price

 

(in years)

 

 

Value (1)

 

Outstanding, beginning of period

 
894,899				
 

$
39.08				
 
9.96				
$
205.8				
 

  —

 

 

  —

 

  —

 

$

  —

 

Granted

 

  —

 

 

  —

 

 

 

 

 
894,899				
 

$
39.08				
 

 

 

 

 

 

Exercised

 

  —

 

 

  —

 

 

 

 

 

  —

 

 

  —

 

 

 

 

 

 

Canceled

 

  —

 

 

  —

 

 

 

 

 

  —

 

 

  —

 

 

 

 

 

 

Outstanding, end of period

 
894,899				
 

$
39.08				
 
8.96				
$

  —

 
894,899				
 

$
39.08				
 
9.96				
 

$
205.8				
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable, end of period

 
298,301				
 

$
39.08				
 
8.96				
$

  —

 

  —

 

$

  —

 

  —

 

$

  —

 

 (1)

Aggregate intrinsic value is calculated based on the difference between our closing stock price at year end and the exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have been received by the option holders, had they all exercised all their options on the fiscal year end date.

 

For the year ended January 31, 2016 and the one month ended January 31, 2015, we recorded $3.9 and $0.2, respectively, of stock-based compensation expense related to these options that is included within selling, general and administrative expenses. At January 31, 2016 and January 31, 2015, the unrecognized stock-based compensation related to these options was $7.5 and $11.3, respectively, and is expected to be recognized over a weighted-average period of 1.87 and 2.87 years, respectively.

 

F-23

 

Table of Contents
We use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, risk-free interest rate and expected dividends.

 

Due to the limited trading history of our common stock, we estimated expected volatility based on historical data of comparable public companies. The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated based on guidelines provided in U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 110 and represents the average of the vesting tranches and contractual terms. The risk-free rate assumed in valuing the options is based on the U.S. Treasury rate in effect at the time of grant for the expected term of the option. We do not anticipate paying any cash dividends in the foreseeable future and, therefore, used an expected dividend yield of zero in the option pricing model. Compensation expense is recognized only for those options expected to vest with forfeitures estimated based on our historical experience at B/E Aerospace and future expectations. Stock-based compensation awards are amortized on a straight line basis over a three year period.

 

The weighted average assumptions used to value the option grants are as follows:

 

 

 

 

 

 

    

January 31,

 

 

 

2015

 

Expected life (in years)

 
6.50				
 

Volatility

 
30.0%				
 

Risk free interest rate

 
1.5%				
 

Dividend yield

 

  -

 

 

The weighted average fair value per option at the grant date for options issued during the one month ended January 31, 2015 was $12.99.

 

12. EMPLOYEE STOCK PURCHASE PLAN

 

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. KLX issued approximately 50,000 shares of common stock to employees of the Company during the year ended January 31, 2016 at a weighted average price per share of $30.62. B/E Aerospace had a similar plan and issued approximately 19,000 and 16,000 shares of common stock to employees of the Company during the years ended December 31, 2014 and 2013, respectively, pursuant to this plan at a weighted average price per share of $71.40 and $61.60, respectively. No shares of common stock were issued during the one month ended January 31, 2015.

 

13. SEGMENT REPORTING

 

The Company is organized based on the products and services it offers. As a result of the ESG acquisitions, the Company determined that ESG met the requirements of a reportable segment, and its operations during 2013 were not significant. The Company’s ASG reportable segment, which is also its operating segment, is comprised of consumables management and is in a single line of business. The 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. This group is comprised of the Chairman and Chief Executive Officer and the President and Chief Operating Officer.

 

F-24

 

Table of Contents
The following table presents revenues and other financial information by business segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended January 31, 2016

 

 

    

Aerospace Solutions Group

    

Energy Services Group

    

Consolidated

 

Revenues

 

$
1,312.5				
 

$
254.9				
 

$
1,567.4				
 

Operating earnings (loss)(1)

 

 
211.6				
 

 
(748.4)				
 

 
(536.8)				
 

Total assets(2)

 

 
3,422.8				
 

 
268.2				
 

 
3,691.0				
 

Goodwill

 

 
952.4				
 

 
2.5				
 

 
954.9				
 

Capital expenditures(3)

 

 
30.4				
 

 
100.1				
 

 
130.5				
 

Depreciation and amortization

 

 
28.1				
 

 
46.9				
 

 
75.0				
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2014

 

 

    

Aerospace Solutions Group

    

Energy Services Group

    

Consolidated

 

Revenues

 

$
1,310.2				
 

$
385.5				
 

$
1,695.7				
 

Operating earnings(1)

 

 
192.0				
 

 
54.8				
 

 
246.8				
 

Total assets(2)

 

 
3,298.4				
 

 
982.2				
 

 
4,280.6				
 

Goodwill

 

 
986.3				
 

 
342.4				
 

 
1,328.7				
 

Capital expenditures(3)

 

 
17.7				
 

 
119.1				
 

 
136.8				
 

Depreciation and amortization

 

 
28.0				
 

 
40.0				
 

 
68.0				
 

 

 

 

Year Ended December 31, 2013

 

 

    

Aerospace Solutions Group

    

Energy Services Group

    

Consolidated

 

Revenues

 

$
1,268.1				
 

$
23.5				
 

$
1,291.6				
 

Operating earnings (loss)(1)

 

 
240.2				
 

 
(1.7)				
 

 
238.5				
 

Total assets(2)

 

 
2,937.3				
 

 
126.7				
 

 
3,064.0				
 

Goodwill

 

 
1,027.7				
 

 
42.1				
 

 
1,069.8				
 

Capital expenditures(3)

 

 
25.3				
 

 
4.1				
 

 
29.4				
 

Depreciation and amortization

 

 
25.8				
 

 
2.0				
 

 
27.8				
 

 

 

 

Month Ended January 31, 2015

 

 

    

Aerospace Solutions Group

    

Energy Services Group

    

Consolidated

 

Revenues

 

$
93.1				
 

$
39.9				
 

$
133.0				
 

Operating earnings(1)

 

 
12.9				
 

 
4.8				
 

 
17.7				
 

Total assets(2)

 

 
3,252.2				
 

 
972.4				
 

 
4,224.6				
 

Goodwill

 

 
965.8				
 

 
320.7				
 

 
1,286.5				
 

Capital expenditures(3)

 

 
1.7				
 

 
4.5				
 

 
6.2				
 

Depreciation and amortization

 

 
2.4				
 

 
4.9				
 

 
7.3				
 

 (1)

Operating earnings includes an allocation of corporate IT costs, employee benefits and general and administrative costs. The allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenues generated, costs incurred, headcount or other measures. 

 

 (2)

Corporate assets (including cash and cash equivalents) of $559.5, $451.6, $508.4 and $0 at January 31, 2016 and 2015 and December 31, 2014 and 2013, respectively, have been allocated to the above segments based on each segment’s percentage of total assets.

 

 (3)

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

 

F-25

 

Table of Contents
Geographic Information

 

The Company operates principally in three geographic areas, the United States, Europe (primarily Germany) and emerging markets, such as Asia, the Pacific Rim and the Middle East. There were no significant transfers among geographic areas during these periods.

 

The following table presents revenues and operating (loss) earnings based on the originating location for the years ended January 31, 2016, December 31, 2014 and 2013 and the one month ended January 31, 2015. Additionally, it presents all identifiable assets related to the operations in each geographic area as of January 31, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Month Ended

 

 

    

January 31, 2016

    

December 31, 2014

    

December 31, 2013

    

January 31, 2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$
1,453.4				
 

$
1,505.3				
 

$
1,116.6				
 

$
124.1				
 

Foreign

 

 
114.0				
 

 
190.4				
 

 
175.0				
 

 
8.9				
 

 

 

$
1,567.4				
 

$
1,695.7				
 

$
1,291.6				
 

$
133.0				
 

Operating (loss) earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$
(561.0)				
 

$
195.5				
 

$
170.9				
 

$
15.0				
 

Foreign

 

 
24.2				
 

 
51.3				
 

 
67.6				
 

 
2.7				
 

 

 

$
(536.8)				
 

$
246.8				
 

$
238.5				
 

$
17.7				
 

 

 

 

 

 

 

 

 

 

 

    

January 31, 2016

    

January 31, 2015

 

Identifiable assets:

 

 

 

 

 

 

 

Domestic

 

$
3,182.2				
 

$
3,710.3				
 

Foreign

 

 
508.8				
 

 
514.3				
 

 

 

$
3,691.0				
 

$
4,224.6				
 

 

Revenues by geographic area, based on destination, for the years ended January 31, 2016, December 31, 2014 and 2013 and the one month ended January 31, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Month Ended

 

 

 

January 31, 2016

 

December 31, 2014

 

December 31, 2013

 

January 31, 2015

 

 

    

 

 

    

% of

 

 

 

    

% of

    

 

 

    

% of

    

 

 

    

% of

 

 

 

Revenues

 

Revenues

 

Revenues

 

Revenues

 

Revenues

Revenues

 

Revenues

 

Revenues

 

U.S.

 

$
955.3				
 
61.0				
% 

$
1,111.5				
 
65.5				
% 

$
749.1				
 
58.0				
% 

$
90.1				
 
67.7				
%

Europe

 

 
376.3				
 
24.0				
% 

 
374.2				
 
22.1				
% 

 
350.6				
 
27.1				
% 

 
28.3				
 
21.3				
%

Asia, Pacific Rim, Middle East and other

 

 
235.8				
 
15.0				
% 

 
210.0				
 
12.4				
% 

 
191.9				
 
14.9				
% 

 
14.6				
 
11.0				
%

 

 

$
1,567.4				
 
100.0				
% 

$
1,695.7				
 
100.0				
% 

$
1,291.6				
 
100.0				
% 

$
133.0				
 
100.0				
%

 

Export revenues from the United States to customers in foreign countries amounted to $457.9, $414.3, $361.4 and $29.6 in the years ended January 31, 2016, December 31, 2014 and 2013 and the one month ended January 31, 2015, respectively.

 

14. FAIR VALUE INFORMATION

 

All financial instruments are 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.

F-26

 

Table of Contents
 

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 January 31, 2016 and 2015. 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 $1,136.4 and $1,182.0 as of January 31, 2016 and 2015, respectively.

 

Goodwill and long-lived assets, including property and equipment and purchased intangibles subject to amortization were impaired and written down to their estimated fair values during the third quarter of Fiscal 2015. The goodwill level 3 fair value was determined using an income based approach utilizing estimates of future cash flow, discount rate and long-term growth rate, all of which were unobservable. The long-lived asset level 3 fair value was determined using a combination of the cost approach and the market approach, which used inputs that included replacement costs (unobservable), physical deterioration estimates (unobservable), economic obsolescence (unobservable), and market sales data for comparable assets.

 

The following table summarizes impairments of goodwill and long-lived assets and the related post impairment fair values of the corresponding ESG assets for the year ended January 31, 2016:

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

January 31, 2016

 

 

    

Impairment

    

Fair Value

 

Property and equipment, net

 

$
152.0				
 

$
174.3				
 

Goodwill

 

 
310.4				
 

 

  —

 

Intangible assets

 

 
177.8				
 

 

  —

 

 

 

$
640.2				
 

$
174.3				
 

 

Fair value is measured as of the impairment date using Level 3 inputs. See Note 4 for a discussion of the asset impairment charge recorded during the third quarter of Fiscal 2015.

 

The fair value information presented herein is based on pertinent information available to management at January 31, 2016 and 2015, respectively. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated and combined financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented herein.

 

F-27

 

Table of Contents
15. SELECTED QUARTERLY DATA (Unaudited)

 

Summarized quarterly financial data for the years ended January 31, 2016 and December 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended January 31, 2016

 

 

    

First

    

Second

    

Third

    

Fourth

 

 

 

Quarter

 

Quarter

 

Quarter (3)

 

Quarter(4)

 

Revenues

 

$
431.5				
 

$
412.7				
 

$
365.0				
 

$
358.2				
 

Cost of sales

 

 
323.9				
 

 
315.3				
 

 
279.1				
 

 
284.1				
 

Net earnings (loss)

 

 
17.9				
 

 
7.4				
 

 
(400.8)				
 

 
(10.3)				
 

Basic net earnings (loss) per share(1)

 

 
0.34				
 

 
0.14				
 

 
(7.68)				
 

 
(0.20)				
 

Diluted net earnings (loss) per share(1)(2)

 

 
0.34				
 

 
0.14				
 

 
(7.68)				
 

 
(0.20)				
 

(1)  Net earnings per share are computed individually for each quarter presented. Therefore, the sum of the quarterly net earnings per share may not necessarily equal the total for the year.

 

(2)  The Company has potential common stock equivalents related to its outstanding restricted stock awards, restricted stock units and employee stock purchase plan. These potential common stock equivalents were not included in diluted loss per share for the three months ended January 31, 2016 because the effect would have been anti‐dilutive. Accordingly, basic and diluted loss per common share and the weighted average number of shares used in the computation are the same for the three months ended January 31, 2016. For each of the other periods presented, the Company had potential common stock equivalents related to its outstanding restricted stock awards, restricted stock units and employee stock purchase plan as of January 31, 2016 that were considered in the Company’s diluted earnings per share calculation.

 

(3)  Net loss in the third quarter includes an impairment charge of $640.2 including a goodwill impairment of $310.4, $177.8 related to identifiable intangibles and $152.0 related to PP&E.

 

(4)  Net loss in the fourth quarter includes $32.4 of non‐recurring costs, including acquisition and integration costs, severance and other Spin‐off related costs.

 

 

 

Year Ended December 31, 2014

 

 

    

First

    

Second

    

Third

    

Fourth

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter(3)

 

Revenues

 

$
370.9				
 

$
430.9				
 

$
453.2				
 

$
440.7				
 

Cost of sales

 

 
255.8				
 

 
299.9				
 

 
316.9				
 

 
322.3				
 

Net earnings

 

 
44.0				
 

 
45.4				
 

 
31.3				
 

 
(32.6)				
 

Basic net earnings (loss) per share(1)

 

 
0.84				
 

 
0.87				
 

 
0.60				
 

 
(0.62)				
 

Diluted net earnings (loss) per share(1)(2)

 

 
0.84				
 

 
0.87				
 

 
0.60				
 

 
(0.62)				
 

(1)  Net earnings per share are computed individually for each quarter presented. Therefore, the sum of the quarterly net earnings per share may not necessarily equal the total for the year.

 

(2)  The Company has potential common stock equivalents related to its outstanding restricted stock awards, restricted stock units and employee stock purchase plan. These potential common stock equivalents were not included in diluted loss per share for the three months ended December 31, 2014 because the effect would have been anti-dilutive. Accordingly, basic and diluted loss per common share and the weighted average number of shares used in the computation are the same for the three months ended December 31, 2014. For each of the other periods presented, the Company had potential common stock equivalents related to its outstanding restricted stock awards, restricted stock units and employee stock purchase plan as of December 31, 2014 that were considered in the Company's diluted earnings per share calculation.

 

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Table of Contents
(3)  Net loss in the fourth quarter includes non-recurring costs, including acquisition and integration costs, severance, other Spin-off related costs and exit taxes related to a major international tax planning initiative aggregating approximately $98.0 ($26.2 in the third quarter).

 

F-29

 

Table of Contents
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

 

FOR THE YEARS ENDED JANUARY 31, 2016, DECEMBER 31, 2014 AND 2013

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance At

    

 

 

    

 

 

    

 

 

    

Balance At

 

 

 

Beginning

 

 

 

 

 

 

 

Write-Offs/

 

End

 

 

 

Of Period

 

Expenses

 

Other

 

Disposals

 

Of Period

 

Deducted From Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended January 31, 2016

 

$
8.0				
 

$
4.1				
 

$

  —

 

$
0.8				
 

$
11.3				
 

Month ended January 31, 2015

 

 
8.1				
 

 
0.1				
 

 

  —

 

 
0.2				
 

 
8.0				
 

Year ended December 31, 2014

 

 
6.0				
 

 
12.4				
 

 
0.2				
 

 
10.5				
 

 
8.1				
 

Year ended December 31, 2013

 

 
7.5				
 

 
1.4				
 

 
0.3				
 

 
3.2				
 

 
6.0				
 

Reserve for obsolete inventory:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended January 31, 2016

 

$
33.5				
 

$
7.7				
 

$

  —

 

$
0.8				
 

$
40.4				
 

Month ended January 31, 2015

 

 
33.0				
 

 
0.7				
 

 

 

 

 
0.2				
 

 
33.5				
 

Year ended December 31, 2014

 

 
30.3				
 

 
4.6				
 

 

  —

 

 
1.9				
 

 
33.0				
 

Year ended December 31, 2013

 

 
30.6				
 

 
2.9				
 

 

  —

 

 
3.2				
 

 
30.3				
 

Deferred tax asset valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended January 31, 2016

 

$
24.8				
 

$

  —

 

$
7.1				
 

$
(10.0)				
 

$
21.9				
 

Month ended January 31, 2015

 

 
24.8				
 

 

  —

 

 

  —

 

 

  —

 

 
24.8				
 

Year ended December 31, 2014

 

 
12.8				
 

 

  —

 

 
12.0				
 

 

  —

 

 
24.8				
 

Year ended December 31, 2013

 

 
11.4				
 

 

  —

 

 
1.4				
 

 

  —

 

 
12.8				
 

 

 

F-30