Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (U.S. dollars in millions, except per unit data)
You should read the following discussion of our results of operations and financial condition together with our audited consolidated financial statements and accompanying notes included elsewhere in this Annual Report as well as the discussion in “Item 1. Business.” This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on our current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those we discuss in “Item 1A. Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”
The following discussion and analysis addresses the results of our operations for the year ended December 31, 2023, as compared to the year ended December 31, 2022. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods.
Company History
KLX Energy Services was initially formed from the combination of seven private oilfield service companies acquired during 2013 and 2014. The Company continued to selectively acquire regional and product line specific businesses through 2019 to expand our service capabilities and broaden our geographic presence. Once the acquisitions were completed, we undertook a comprehensive integration of these businesses to align our services, our people and our assets across all the geographic regions where we maintain a presence. We acquired QES during the second quarter of 2020 and, by doing so, helped establish KLXE as an industry leading provider of asset-light oilfield solutions across the full well lifecycle to the major onshore oil and gas producing regions of the United States.
On July 26, 2020, the Company’s Board approved a 1-for-5 reverse stock split to stockholders that became effective at 12:01 a.m. on July 28, 2020. On July 28, 2020, we successfully completed the all-stock merger with QES.
The merger of KLXE and QES provided increased scale to serve a blue-chip customer base across the onshore oil and gas basins in the United States. The QES Merger combined two strong company cultures comprised of highly talented teams with shared commitments to safety, performance, customer service and profitability. The combination leveraged two of the largest fleets of coiled tubing and wireline assets, with KLXE becoming a leading provider of large diameter coiled tubing and wireline services and one of the largest independent providers of directional drilling to the U.S. market. After closing the QES Merger, the Company integrated personnel, facilities, processes and systems across all functional areas of the organization.
We focused on generating additional cost savings from the QES Merger and to date have realized such savings through eliminating KLXE's legacy corporate headquarters in Wellington, Florida, rationalizing associated corporate functions to Houston, and capturing operational synergies in the areas of personnel, facilities and rolling stock. The QES Merger also enhanced the Company’s ability to effect further industry consolidation. Looking ahead, the Company continues to pursue strategic, accretive consolidation opportunities that further strengthen the Company’s competitive positioning and capital structure and drive efficiencies, accelerate growth and create long‑term stockholder value.
Greene’s Acquisition
On March 8, 2023, the Company completed the acquisition of all of the equity interests of Greene’s, including $1.7 in cash remaining at Greene's, which was subsequently adjusted to $1.1 due to a $0.6 working capital adjustment. The acquisition was made pursuant to that certain purchase and sale agreement dated March 8, 2023, between the Company and Greene’s Holding Corporation (the “Purchase Agreement”). Greene's is a provider of wellhead protection, flowback and well testing services. The total consideration for the Greene’s
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Acquisition under the Purchase Agreement consisted of the issuance of approximately 2.4 million shares of the Company's Common Stock, par value $0.01 per share, subject to customary post-closing adjustments, representing 14.7% of the fully diluted Common Stock of the Company with an implied enterprise value of approximately $30.3 based on a 30-day volume weighted average price as of March 7, 2023 less acquired cash. As of the date of this filing, the integration is complete. See Note 3 - Business Combinations to our audited consolidated financial statements included in Item 8 in this Form 10-K.
Company Overview
We serve many of the leading companies engaged in the exploration and development of onshore conventional and unconventional oil and natural gas reserves in the United States. Our customers are primarily large independent and major oil and gas companies. We currently support these customer operations from over 50 service facilities located in the key major shale basins. We operate in three segments on a geographic basis, including the Southwest Region (the Permian Basin, Eagle Ford Shale and the Gulf Coast as well as in industrial and petrochemical facilities), the Rocky Mountains Region (the Bakken, Williston, DJ, Uinta, Powder River, Piceance and Niobrara basins) and the Northeast/Mid-Con Region (the Marcellus and Utica Shale as well as the Mid-Continent STACK and SCOOP and Haynesville Shale) . Our revenues, operating earnings and identifiable assets are primarily attributable to these three reportable geographic segments. While we manage our business based upon these geographic groupings, our assets and our technical personnel are deployed on a dynamic basis across all of our service facilities to optimize utilization and profitability.
These expansive operating areas provide us with access to a number of nearby unconventional crude oil and natural gas basins, both with existing customers expanding their production footprint and third parties acquiring new acreage. Our proximity to existing and prospective customer activities allows us to anticipate or respond quickly to such customers’ needs and efficiently deploy our assets. We believe that our strategic geographic positioning will benefit us as activity increases in our core operating areas. Our broad geographic footprint provides us with exposure to the ongoing recovery in drilling, completion, production and intervention related service activity and will allow us to opportunistically pursue new business in basins with the most active drilling environments.
We work with our customers to provide engineered solutions across the lifecycle of the well by streamlining operations, reducing non-productive time and developing cost effective solutions and customized tools for our customers’ most challenging service needs, including their most technically complex extended reach horizontal wells. We believe future revenue growth opportunities will continue to be driven by increases in the number of new customers served and the breadth of services we offer to existing and prospective customers.
We offer a variety of targeted services that are differentiated by the technical competence and experience of our field service engineers and their deployment of a broad portfolio of specialized tools and proprietary equipment. Our innovative and adaptive approach to proprietary tool design has been employed by our in-house R&D organization and, in selected instances, by our technology partners to develop tools covered by 38 patents and 9 pending patent applications, which we believe differentiates us from our regional competitors and also allows us to deliver more focused service and better outcomes in our specialized services than larger national competitors that do not discretely dedicate their resources to the services we provide.
We utilize contract manufacturers to produce our products, which, in many cases, our engineers have developed from input and requests from our customers and customer-facing managers, thereby maintaining the integrity of our intellectual property while avoiding manufacturing startup and maintenance costs. This approach leverages our technical strengths, as well as those of our technology partners. These services and related products are modest in cost to the customer relative to other well construction expenditures but have a high cost of failure and are, therefore, mission critical to our customers’ outcomes. We believe our customers have come to depend on our decades of field experience to execute on some of the most challenging problems they face. We believe we are well positioned as a company to service customers when they are drilling and completing complex wells, and remediating both newer and older legacy wells.
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We invest in innovative technology and equipment designed for modern production techniques that increase efficiencies and production for our customers. North American unconventional onshore wells are increasingly characterized by extended lateral lengths, tighter spacing between hydraulic fracturing stages, increased cluster density and heightened proppant loads. Drilling and completion activities for wells in unconventional resource plays are extremely complex, and downhole challenges and operating costs increase as the complexity and lateral length of these wells increase. For these reasons, E&P companies with complex wells increasingly prefer service providers with the scale and resources to deliver best-in-class solutions that evolve in real-time with the technology used for extraction. We believe we offer best-in-class service execution at the wellsite and innovative downhole technologies, positioning us to benefit from our ability to service the most technically complex wells where the potential for increased operating leverage is high due to the large number of stages per well.
We endeavor to create a next generation oilfield services company in terms of management controls, processes and operating metrics, and have driven these processes down through the operating management structure in every region, which we believe differentiates us from many of our competitors. This allows us to offer our customers in all of our geographic regions discrete, comprehensive and differentiated services that leverage both the technical expertise of our skilled engineers and our in-house R&D team.
Recent Trends and Outlook
Demand for services in the oil and natural gas industry is cyclical and subject to sudden and significant volatility. The oil and gas industry experienced significant increases in activity in late 2021 and 2022 due to the recovery from the COVID-19 pandemic and increasing demand for oil and gas. Furthermore, sanctions and import bans on Russian oil have been implemented by various countries in response to the ongoing conflict in Ukraine, further impacting global oil supply. While oil prices declined in the first half of 2023 from their 2022 highs, oil prices rebounded in the third quarter of 2023 due to stronger than anticipated economic growth and sustained production cuts from Saudi Arabia and Russia, followed by oil price decreases in the fourth quarter of 2023 due to a decrease in demand as the overall economy declined. Natural gas prices also declined in the fourth quarter of 2023. Oil and natural gas prices have been, and may remain, volatile, which impacts demand for our business. WTI's average daily price per barrel decreased by approximately $17.32, or 18.3%, to $77.58 per Bbl during the year ended December 31, 2023, compared to the average daily price per barrel of $94.90 during the year ended December 31, 2022. As of December 31, 2023, U.S. rig count stood at 622, a decrease of 20.2% since December 31, 2022.
Despite the decrease in commodity prices during the fiscal year ended December 31, 2023, the Company remained focused on building a leaner and more profitable set of service offerings, which allowed us to make meaningful positive impacts to our revenue, operating margins, cash flows and Adjusted EBITDA (as defined below).
Looking ahead to the year ending December 31, 2024, assuming economic activity holds at the recent level and commodity prices remain volatile, we anticipate that our customers will continue to cautiously allocate capital and operating expense spending. So far in the year ending December 31, 2024, WTI prices have noted a slight increase of 10%, as demand for oil and gas products persists. Currently, global oil inventories supplied from OPEC and its allies (“OPEC+”) and other oil producing nations are expected to transition to inventory decreases throughout the majority of 2024 from inventory builds during the first half of 2023. This persisting demand and expectation of decreased inventory is balanced against weather-related challenges across the country as well as a cautious approach to drilling expansion, as evidenced by the U.S. rig count being flat through January 29, 2024.
Oil and natural gas prices could decrease or increase with any changes in demand due to, among other things, the ongoing conflict in Ukraine, the recent Israel-Hamas conflict, international sanctions, speculation as to future actions by OPEC+, gas prices, interest rates, inflation and government efforts to reduce inflation, and possible changes in the overall health of the global economy, including a perceived economic recovery or any increased volatility in financial and credit markets or a prolonged recession. To what extent these and other external factors (such as government action with respect to climate change regulation) ultimately impact
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our future business, liquidity, financial condition, and results of operations is highly uncertain and dependent on numerous factors, including future developments, that are not within our control and cannot be accurately predicted.
How We Generate Revenue and the Costs of Conducting Our Business
Our business strategy seeks to generate attractive returns on capital by providing differentiated services and prudently applying our cash flow to select targeted opportunities, with the potential to deliver high returns that we believe offer superior margins over the long-term and short payback periods. Our services generally require equipment that is less expensive to maintain and is operated by a smaller staff than many other oilfield service providers. As part of our returns-focused approach to capital spending, we are focused on efficiently utilizing capital to develop new products. We support our existing asset base with targeted investments in R&D, which we believe allows us to maintain a technical advantage over our competitors providing similar services using standard equipment.
Demand for services in the oil and natural gas industry is cyclical and subject to sudden and significant volatility. We remain focused on serving the needs of our customers by providing a broad portfolio of product service lines across all of the active major basins, while preserving a solid balance sheet, maintaining sufficient operating liquidity and prudently managing our capital expenditures.
We believe we have strong management systems in place, which will allow us to manage our operating resources and associated expenses relative to market conditions. Historically, we believe our services generated margins superior to our competitors based upon the differential quality of our performance, and that these margins would contribute to future cash flow generation. The required investment in our business includes both working capital (principally for accounts receivable, inventory and accounts payable growth tied to increasing activity) and capital expenditures for both maintenance of existing assets and ultimately growth when economic returns justify the spending. Our required maintenance capital expenditures tend to be lower than other oilfield service providers due to the generally asset-light nature of our services, the lower average age of our assets and our ability to charge back a portion of asset maintenance to customers for a number of our assets.
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Results of Operations
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Revenue . The following table provides revenues by segment and product line for the periods indicated:
Year Ended
December 31, 2023 December 31, 2022 % Change
Revenue:
Rocky Mountains $ 271.3 $ 229.0 18.5 %
Southwest 304.9 255.2 19.5 %
Northeast/Mid-Con 312.2 297.4 5.0 %
Total revenue $ 888.4 $ 781.6 13.7 %
Year Ended
December 31, 2023 December 31, 2022 % Change
Revenue:
Drilling $ 220.2 $ 218.7 0.7 %
Completion 468.5 393.3 19.1 %
Production 117.8 94.2 25.1 %
Intervention 81.9 75.4 8.6 %
Total revenue $ 888.4 $ 781.6 13.7 %
For the year ended December 31, 2023, revenues of $888.4 increased by $106.8 or 13.7% as compared with the year ended December 31, 2022. The overall increase in revenues reflects increased demand for our services and a positive pricing environment in the first half of 2023, even as activity fell and then stabilized in the second half of the year. This increase was driven entirely by an increase in weighted average price. On a segment basis, Rocky Mountains segment revenue increased by $42.3 or 18.5%. Increased weighted average price contributed to approximately 83% of the dollar increase, and increased weighted average volume contributed to approximately 17%. Southwest segment revenue increased by $49.7 or 19.5%. This increase was driven by the Greene's Acquisition, offset by activity declines in the base business, as well as modestly improved pricing. Northeast/Mid-Con segment revenue increased by $14.8 or 5.0% . This increase was driven entirely by an increase in weighted average volume.
Cost of sales . For the year ended December 31, 2023, cost of sales was $672.5, or 75.7% of revenues, as compared to $621.3, or 79.5% of revenues, in the year ended December 31, 2022. The increase in dollar amount was primarily due to increased activity and to a lesser degree, increased pricing due to inflation. The decrease in cost of sales as a percentage of revenues was generally consistent across our segments and a result of better leverage of fixed costs due to increased activity. The two largest components of cost of sales are labor and repair & maintenance. Although cost of sales as a percentage of revenues decreased, labor costs per employee increased by 1.7% as compared with the year ended December 31, 2022. Repair & maintenance costs as a percentage of revenues increased by 2.2% as compared to the year ended December 31, 2022.
Selling, general and administrative expenses ("SG&A") . SG&A expenses during the twelve months ended December 31, 2023, were $86.7, or 9.8% of revenues, as compared with $70.4, or 9.0% of revenues, in the year ended December 31, 2022. SG&A increased by $16.3 due to increased labor costs and professional fees. SG&A as a percentage of revenues increased primarily due to an increase in insurance costs along with certain costs related to the acquisition and integration of Greene's. R&D costs during the year ended December 31, 2023 were $1.4, as compared to $0.6 in the year ended December 31, 2022, reflecting our continued focus on maintaining an in-house R&D function while scaling costs to adjust to current levels of customer demand.
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Operating income . The following is a summary of operating income (loss) by segment:
Year Ended
December 31, 2023 December 31, 2022 % Change
Operating income (loss):
Rocky Mountains $ 46.1 $ 27.3 68.9 %
Southwest 19.3 14.5 33.1 %
Northeast/Mid-Con 40.6 39.1 3.8 %
Corporate and other (49.1) (48.4) (1.4) %
Total operating income $ 56.9 $ 32.5 75.1 %
For the year ended December 31, 2023, operating income was $56.9, as compared to operating income of $32.5 in the year ended December 31, 2022, largely driven by an improvement in revenues due to increased activity .
For the year ended December 31, 2023, each of our segments demonstrated improvement in operating income (loss) compared to the year ended December 31, 2022, driven by the increase in pricing and utilization outpacing increases in operating costs and labor in the year ended December 31, 2023. Rocky Mountains segment operating income improved by $18.8 or 68.9% from $27.3 in the year ended December 31, 2022 to $46.1 in the year ended December 31, 2023. Southwest segment operating income improved by $4.8 or 33.1% from $14.5 in the year ended December 31, 2022 to $19.3 in the year ended December 31, 2023. Northeast/Mid-Con segment operating income improved by $1.5 or 3.8% from $39.1 in the year ended December 31, 2022 to $40.6 in the year ended December 31, 2023. The 1.4% increase in operating loss in our Corporate and other segment in the year ended December 31, 2023 was primarily driven by higher professional service fees and incentive bonus costs.
Income tax expense . Income tax expense was $3.0 for the year ended December 31, 2023, and was comprised of federal, state and local taxes, as compared to income tax expense of $0.6 in the year ended December 31, 2022, which was comprised primarily of state and local taxes.
Net income (loss) . Net income for the year ended December 31, 2023 was $19.2, as compared to net loss of $3.1 in the year ended December 31, 2022, primarily due to increased pricing and improved margins for our services.
Liquidity and Capital Resources
Overview
We require capital to fund ongoing operations, including maintenance expenditures on our existing fleet and equipment, organic growth initiatives, debt service obligations, investments and acquisitions. Our primary sources of liquidity to date have been capital contributions from our equity and note holders, borrowings under the Company’s ABL Facility and cash flows from operations. At December 31, 2023, we had $112.5 of cash and cash equivalents and $41.9 available on the ABL Facility.
We have taken several actions to continue to improve our liquidity position, including efficiencies gained from the QES Merger, equity issuances under our ATM Offering program, debt for equity exchanges that have reduced interest burden and monetized non-core and obsolete assets. We actively manage our capital spending and are focused primarily on required maintenance spending. Additionally, increasing oil prices have resulted in an increase in demand for our services and an improvement in our operating cash flow, which became positive in the third and fourth quarters of 2022. We believe based on our current forecasts, our cash on hand, the ABL Facility availability, together with our cash flows, will provide us with the ability to fund our operations, including planned capital expenditures, for at least the next twelve months.
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We have substantial indebtedness. As of December 31, 2023, we had total outstanding long-term indebtedness of $284.3 under our ABL Facility and Senior Notes as described in greater detail under “—ABL Facility” and “—Senior Notes” below. Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend on our future operating performance and ability to refinance our debt as it becomes due. Our future operating performance and ability to refinance such indebtedness will be affected by prevailing economic and political conditions, the level of drilling, completion, production and intervention services activity for North American onshore oil and natural gas resources, the willingness of capital providers to lend to our industry and other financial and business factors, many of which are beyond our control.
Our ability to refinance our debt will depend on the condition of the public and private debt markets and our financial condition at such time, among other things. Any refinancing of our debt could be at higher interest rates and may require us to comply with covenants, which could further restrict our business operations. A rising interest rate environment could have an adverse impact on the price of our shares, or our ability to issue equity or incur debt to refinance our existing indebtedness, for acquisitions or other purposes. In addition, incurring additional debt in excess of our existing outstanding indebtedness would result in increased interest expense and financial leverage, and issuing Common Stock may result in dilution to our current stockholders.
Our ABL Facility matures on the ABL Maturity Date (as defined below) and we intend to work with our existing lenders or other sources of capital to refinance the ABL Facility as well as our Senior Notes. If we are unable to refinance the ABL Facility as planned and uncertainty around our ability to refinance our existing long-term debt still exists, that could result in our auditors issuing a “going concern” or like qualification or exception as early as our audit opinion with respect to the year ending December 31, 2024. The delivery of an audit opinion with such a qualification would result in an event of default under our ABL Facility. If an event of default occurs, the lenders under the ABL Facility would be entitled to accelerate any outstanding indebtedness, terminate all undrawn commitments and enforce liens securing our obligations under the ABL Facility. Further, the acceleration of indebtedness under our ABL Facility could cause an event of default under our Senior Notes, entitling the requisite holders of the Senior Notes to accelerate our indebtedness in respect thereof and enforce liens securing our obligations under the Senior Notes. If our lenders or noteholders accelerate our obligations under the affected debt agreements, we may not have sufficient liquidity to repay all of our outstanding indebtedness then due and payable.
In light of our substantial leverage position, as market conditions warrant and subject to our contractual restrictions, liquidity position and other factors, we may access the public or private debt and equity markets or seek to recapitalize, refinance or otherwise restructure our capital structure. Some of these alternatives may require the consent of current lenders, stockholders or noteholders, and there is no assurance that we will be able to execute any of these alternatives on acceptable terms or at all.
ABL Facility
We entered into a $100.0 ABL Facility on August 10, 2018. The ABL Facility became effective on September 14, 2018 and is scheduled to mature on the ABL Maturity Date in 2025. Borrowings under the ABL Facility bear interest at a rate equal to Term SOFR (as defined in the ABL Facility) plus the Applicable Margin (as defined in the ABL Facility). The ABL Facility is tied to a borrowing base formula and has no maintenance financial covenants as long as the minimum level of borrowing availability is maintained. The ABL Facility is secured by, among other things, a first priority lien on the Company’s accounts receivable and inventory and contains customary conditions precedent to borrowing and affirmative and negative covenants. $50.0 was outstanding under the ABL Facility as of December 31, 2023. The effective interest rate under the ABL Facility was approximately 7.96% on December 31, 2023.
On June 20, 2023, the Company entered into a Fourth Amendment to the ABL Facility, with certain of its subsidiaries party thereto, as guarantors, with JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and an issuing lender, and the other lenders and issuing lenders party thereto from time to time (the “ABL Amendment”).
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The ABL Amendment, among other things, (i) extended the maturity date of the ABL Facility from September 15, 2024 to the earlier of (A) September 15, 2025 or (B) August 1, 2025, if the Company's Senior Notes are still outstanding as of such date (the earlier of the foregoing item (A) or item (B), the “ABL Maturity Date”) and (ii) increased the revolving credit commitment from $100.0 to $120.0.
The ABL Facility includes a springing financial covenant which requires the Company’s fixed-charge coverage ratio (“FCCR”) to be at least 1.0 to 1.0 if availability falls below the greater of $15.0 or 20% of the borrowing base. At all times during the year ended December 31, 2023, availability exceeded this threshold, and the Company was not subject to this financial covenant. As of December 31, 2023, the FCCR was above 1.0 to 1.0. The Company was in full compliance with its ABL Facility as of December 31, 2023.
The ABL Facility includes financial, operating and negative covenants that limit our ability to incur indebtedness, to create liens or other encumbrances, to make certain payments and investments, including dividend payments, to engage in transactions with affiliates, to engage in sale/leaseback transactions, to guarantee indebtedness and to sell or otherwise dispose of assets and merge or consolidate with other entities. It also includes a covenant to deliver annual audited financial statements that are not qualified by a “going concern” or like qualification or exception. A failure to comply with the obligations contained in the ABL Facility could result in an event of default, which could permit acceleration of the debt, termination of undrawn commitments and enforcement against any liens securing the debt.
Senior Notes
In conjunction with the acquisition of Motley Services, LLC (“Motley”) in 2018, we issued $250.0 principal amount of the Senior Notes offered pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons outside the United States in compliance with Regulation S under the Securities Act. On a net basis, after taking into consideration the debt issuance costs for the Senior Notes, total debt as of December 31, 2023 was $234.4. The Senior Notes bear interest at an annual rate of 11.5%, payable semi-annually in arrears on May 1 and November 1. Accrued interest as of December 31, 2023 was $4.5.
The Indenture contains customary affirmative and negative covenants restricting, among other things, the Company’s ability to incur indebtedness and liens, pay dividends or make other distributions, make certain other restricted payments or investments, sell assets, enter into restrictive agreements, enter into transactions with the Company’s affiliates, and merge or consolidate with other entities or sell substantially all of the Company’s assets.
The Indenture also contains customary events of default including, among other things, the failure to pay interest for 30 days, failure to pay principal when due, failure to observe or perform any other covenants or agreement in the Indenture subject to grace periods, cross-acceleration to indebtedness with an aggregate principal amount in excess of $50.0, material impairment of liens, failure to pay certain material judgments and certain events of bankruptcy.
During the year ended December 31, 2022, we entered into the Exchange Agreements with the Noteholders of our Senior Notes. Pursuant to the Exchange Agreements, the Noteholders exchanged $12.8 in aggregate principal amount of the Company’s outstanding Senior Notes for an aggregate of 777,811 shares of our Common Stock through the Exchanges.
The Company’s shares of Common Stock issued in connection with the Exchanges were not registered under the Securities Act, and were issued to existing holders of the Company’s securities without commission in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act.
The Senior Notes exchanged represent approximately 5.1% of the outstanding principal amount of outstanding Senior Notes prior to the Exchanges. Following the Exchanges, approximately $237.3 in aggregate principal amount of Senior Notes remained outstanding.
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Capital Expenditures
Our capital expenditures were $57.1 during the year ended December 31, 2023, compared to $35.6 in the year ended December 31, 2022. Based on current industry conditions and our significant investments in capital expenditures over the past several years, we expect to incur between $50.0 and $60.0 in capital expenditures for the year ending December 31, 2024, out of which approximately 75% is earmarked for maintenance capital spending. The nature of our capital expenditures is comprised of a base level of investment required to support our current operations and amounts related to growth and Company initiatives. Capital expenditures for growth and Company initiatives are discretionary. We continually evaluate our capital expenditures, and the amount we ultimately spend will depend on a number of factors, including expected industry activity levels and Company initiatives.
Equity Distribution Agreement
On June 14, 2021, the Company entered into the Equity Distribution Agreement with the Agent. Pursuant to the terms of the Equity Distribution Agreement, the Company may sell from time to time through the Agent, in the ATM Offering, the Company’s Common Stock, having an aggregate offering price of up to $50.0. On November 16, 2022, the Company entered into the EDA Amendment. Among other things, the EDA Amendment allows for debt for equity exchanges in accordance with Section 3(a)(9) of the Securities Act.
Any Common Stock offered and sold in the ATM Offering will be issued pursuant to the Company’s Registration Statement, the prospectus supplement relating to the ATM Offering filed with the SEC on June 14, 2021 and any applicable additional prospectus supplements related to the ATM Offering that form a part of the Registration Statement. Sales of Common Stock under the Equity Distribution Agreement may be made in any transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act.
The Equity Distribution Agreement contains customary representations, warranties and agreements by the Company, indemnification obligations of the Company and the Agent, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. Under the terms of the Equity Distribution Agreement, the Company will pay the Agent a commission equal to 3% of the gross sales price of the Common Stock sold.
The Company plans to use the net proceeds from the ATM Offering, after deducting the Agent’s commissions and the Company’s offering expenses, for general corporate purposes, which may include, among other things, paying or refinancing all or a portion of the Company’s then-outstanding indebtedness, and funding acquisitions, capital expenditures and working capital.
During the three and twelve months ended December 31, 2023, the Company did not sell any shares of Common Stock and incurred legal and administrative fees of $0.1 and $0.5, respectively. During the three and twelve months ended December 31, 2022, the Company sold 976,808 and 2,803,007 shares of Common Stock, respectively, in exchange for gross proceeds of approximately $15.0 and $25.1, respectively, and paid fees to the sales agent and other legal and accounting fees of $0.1 and $0.3, respectively, to establish the ATM Offering.
Cash Flows
At December 31, 2023, we had $112.5 of cash and cash equivalents. Cash on hand at December 31, 2023 increased by $55.1 during the year then ended, due to $115.6 of cash flows provided by operating activities, partially offset by $20.8 of cash flows used in financing activities and $39.7 of cash flows used in investing activities. Our liquidity requirements consist of working capital needs, debt service obligations and ongoing capital expenditure requirements. Our primary requirements for working capital are directly related to the activity level of our operations.
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This Annual Report includes net working capital, which is a “non-GAAP financial measure” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Net working capital is calculated as current assets, excluding cash, less current liabilities, excluding accrued interest, operating lease obligations and finance lease obligations. We believe that net working capital provides useful information to investors because it is an important indicator of the Company's liquidity. Our computations of net working capital may not be comparable to other similarly titled measures of other companies.
The following table sets forth the reconciliation of current assets and current liabilities to net working capital:
As of
December 31, 2023 December 31, 2022
Current assets $ 290.3 $ 254.7
Less: Cash 112.5 57.4
Net current assets 177.8 197.3
Current liabilities 164.1 154.4
Less: Accrued interest 4.6 4.8
Less: Operating lease obligations 6.9 14.2
Less: Finance lease obligations 22.0 10.2
Net current liabilities 130.6 125.2
Net Working Capital $ 47.2 $ 72.1
Net working capital as of December 31, 2023 was $47.2, a decrease of $24.9 as compared to net working capital of $72.1 as of December 31, 2022. Net working capital is calculated as current assets, excluding cash, less current liabilities, excluding accrued interest, operating lease obligations and finance lease obligations. As of December 31, 2023, total current assets excluding cash decreased by $19.5 and total current liabilities excluding accrued interest, operating lease obligations and finance lease obligations increased by $5.4. The decrease in net current assets was primarily related to a decrease of $27.3 in accounts receivable-trade, net and an increase of $7.8 in inventory. The increase in total current liabilities was due to an increase of $3.7 in accounts payable and an increase of $1.7 in accrued liabilities.
The following table sets forth our cash flows for the periods presented below:
Year Ended
December 31, 2023 December 31, 2022
Net cash provided by operating activities $ 115.6 $ 15.7
Net cash used in investing activities (39.7) (18.7)
Net cash (used in) provided by financing activities (20.8) 32.4
Net change in cash 55.1 29.4
Cash balance end of period $ 112.5 $ 57.4
Net cash provided by operating activities
Net cash provided by operating activities was $115.6 for the year ended December 31, 2023, as compared to net cash provided by operating activities of $15.7 for the year ended December 31, 2022. The increase in operating cash flows was primarily attributable to the increase in revenues across all operating segments and most service and related product lines driven by a broader recovery in industry activity.
Net cash used in investing activities
Net cash used in investing activities was $39.7 for the year ended December 31, 2023, as compared to net cash used in investing activities of $18.7 for the year ended December 31, 2022. The cash used in investing
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activities for the year ended December 31, 2023 was primarily driven by increased maintenance and growth capital spending to support our growing business operations.
Net cash (used in) provided by financing activities
Net cash used in financing activities was $20.8 for the year ended December 31, 2023, compared to net cash provided by financing activities of $32.4 for the year ended December 31, 2022. During the year ended December 31, 2023, there were no additional borrowings under our ABL Facility and no sales under our ATM Offering program.
Off-Balance Sheet Arrangements
Indemnities, Commitments and Guarantees
In the normal course of our business, we make certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to other parties to certain acquisition agreements. The duration of these indemnities, commitments and guarantees varies and, in certain cases, is indefinite. Many of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events that are not reasonably determinable. Our management believes that any liability for these indemnities, commitments and guarantees would not be material to our financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our financial statements.
Business Combinations
We completed our acquisition of Greene's on March 8, 2023. Greene's results of operations have been included in our financial results for the period subsequent to the acquisition date.
Under the ASC 805 acquisition method of accounting, we allocate the fair value of purchase consideration transferred to the tangible assets and intangible assets acquired, if any, and liabilities assumed based on their estimated fair values on the date of the acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on assumptions and methodologies determined by management. Real property was valued using a market approach. Personal property was valued using a combination of market approach and replacement cost approach. The estimated fair value of the assets acquired, net of liabilities assumed, exceeds the purchase consideration, resulting in a bargain purchase gain.
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When determining the fair value of assets acquired, including real property and personal property, and liabilities assumed, we make significant estimates and assumptions. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to bargain purchase gain if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current creditworthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. The allowance for doubtful accounts at December 31, 2023 and December 31, 2022 was $5.5 and $5.7, respectively.
Leases
The Company has elected the practical expedients for all asset classes to carry forward the historical lease classifications and assessment of initial direct costs, account for lease and non-lease components as a single component, and exclude leases with an initial term of less than twelve months in the lease assets and liabilities.
Long‑Lived Assets
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. For the years ended December 31, 2023 and December 31, 2022, there were no impairments of long-lived assets.
Revenue Recognition
Revenue is recognized upon the customer obtaining control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC Topic 606, the following five steps are performed: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. Revenue is recognized in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Service revenues are recorded over time throughout and for the duration of the service period pursuant to a MSA combined with a completed field ticket or a work order. Revenues from product sales are recognized when the customer obtains control of the product, which occurs at a point in time, typically upon delivery in accordance with the terms of the field ticket or work order.
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Recent Accounting Pronouncements
See Note 2 - Recent Accounting Pronouncements to our consolidated financial statements for a discussion of recently issued accounting pronouncements.
How We Evaluate Our Operations
Key Financial Performance Indicators
We recognize the highly cyclical nature of our business and the need for metrics to (1) best measure the trends in our operations and (2) provide baselines and targets to assess the performance of our managers.
The measures we believe most effective to achieve the above stated goals include:
• Revenue
• Operating Income
• Adjusted Earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") : Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. Adjusted EBITDA is not a measure of net earnings or cash flows as determined by GAAP. We define Adjusted EBITDA as net earnings (loss) before interest, taxes, depreciation and amortization, further adjusted for (i) goodwill and/or long-lived asset impairment charges, (ii) stock-based compensation expense, (iii) restructuring charges, (iv) transaction and integration costs related to acquisitions and (v) other expenses or charges to exclude certain items that we believe are not reflective of ongoing performance of our business.
• Adjusted EBITDA Margin: Adjusted EBITDA margin is defined as Adjusted EBITDA, as defined above, as a percentage of revenue.
We believe Adjusted EBITDA is useful because it allows us to supplement the GAAP measures in order to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above in arriving at Adjusted EBITDA (Loss) because these amounts can vary substantially from company to company within our industry depending upon accounting methods, book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net (loss) earnings as determined in accordance with GAAP, or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by Item 305 of Regulation S-K.
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