KLX Energy Services Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2024

The following discussion and analysis should be read in conjunction with the historical condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report as well as our Annual Report on Form 10-K for the year ended December 31, 2023. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Quarterly Report.

The following discussion and analysis addresses the results of our operations for the three and nine months ended September 30, 2024, as compared to our results of operations for the three and nine months ended September 30, 2023. 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 Quintana Energy Services, Inc. (“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.

The merger of KLXE and QES (the “QES Merger”) 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, resulting in KLXE becoming a leading diversified provider of drilling, completions and production services, with market leadership positions in coiled tubing and fishing services. After closing the QES Merger, the Company integrated personnel, facilities, processes and systems across all functional areas of the organization.

On March 8, 2023, KLXE acquired all of the equity interests of Greene’s Energy Group, LLC (“Greene’s”), in an all-stock transaction (the “Greene's Acquisition”), including $1.7 in cash remaining at Greene’s, which was subsequently adjusted to $1.1 due to a $0.6 working capital adjustment.

Looking ahead, the Company expects to continue to pursue opportunistic, strategic, accretive acquisitions that would be expected to further strengthen the Company’s competitive positioning and capital structure and drive efficiencies, accelerate growth and create long‑term stockholder value.

Company Overview

We serve many of the leading companies engaged in the exploration and development of onshore conventional and unconventional oil and natural gas reserves 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 Rocky Mountains Region (the Bakken, Williston, DJ, Uinta, Powder River, Piceance and Niobrara basins), the Southwest Region (the Permian Basin, Eagle Ford Shale and the Gulf Coast as well as in industrial and petrochemical facilities) 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 and 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 active drilling environments.

We work with our customers to provide engineered solutions across the lifecycle of the well by streamlining operations, reducing non-productive time and developing cost effective solutions and customized tools for our customers’ challenging service needs, including their 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 research and development (“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, critical to our customers’ outcomes. We believe our customers have come to depend on our decades of field experience to execute on some of the most challenging problems they face. We believe we are well positioned as a company to service customers when they are drilling and completing complex wells, and remediating both newer and older legacy wells.

We invest in innovative technology and equipment designed for modern production techniques that increase efficiencies and production for our customers. North American unconventional onshore wells are increasingly characterized by extended lateral lengths, tighter spacing between hydraulic fracturing stages, increased cluster density and heightened proppant loads. Drilling and completion activities for wells in unconventional resource plays are extremely complex, and downhole challenges and operating costs increase as the complexity and lateral length of these wells increase. For these reasons, E&P companies with complex wells increasingly prefer service providers with the scale and resources to deliver best-in-class solutions that evolve in real-time with the technology used for extraction. We believe we offer best-in-class service execution at the wellsite and innovative downhole technologies, positioning us to benefit from our ability to service technically complex wells where the potential for increased operating leverage is high due to the large number of stages per well.

We endeavor to 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 war in Ukraine, further impacting global oil supply. Natural gas prices also declined in the fourth quarter of 2023, however, they rebounded in the second and third quarters of 2024. Oil and natural gas prices have been, and may remain, volatile, which impacts demand for our business. West Texas Intermediate’s (“WTI") average daily price per barrel decreased by approximately 2.7%, to $76.43 per Bbl during the three months ended September 30, 2024, compared to the WTI average daily price per barrel of $78.53 per Bbl during the three months ended December 31, 2023. As of September 30, 2024, U.S. land rig count stood at 567, a decrease of 5.8% compared to December 31, 2023, when the U.S. rig count was 602.

Despite the slight decrease in industry metrics above for the first nine months of the year, the Company remains focused on providing the highest level of customer service across our regions and different service offerings, which has allowed us to make meaningful positive impacts to our revenue, operating margins, cash flows and Adjusted EBITDA (as defined below). We are taking steps to hire essential personnel and increase capital expenditures as activity rebounds, but we are measured in our growth and focused on returns.

Looking ahead to the year ending December 31, 2025, 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, as demand for oil and gas products persists. Currently, expectations for future oil demand per OPEC and its allies (“OPEC+”) are to increase by 1.78 million barrels next year. This persisting demand is a positive sign that might help our business grow; however, there are a number of factors that might temper demand, such as those relating to U.S. elections and international events.

In the medium term, we anticipate demand for oil and gas products to hold and even expand, as demand for energy generated from oil and gas grows across the United States. Per S&P Global, nearly 50GW of electricity generation capacity is expected to be added to the U.S. grid by 2028 to support the operations of datacenters. Per the Electric Reliability Council of Texas, generation capacity in the state is set to almost double by 2030, citing increased demand from artificial intelligence data centers and crypto-mining. In addition to domestic electricity generation, there are indications of higher demand for natural gas for export, with S&P Global projecting that feedgas demand could more than double by 2032. These and other expected developments point to increased demand for the products our services help to extract.

Oil and natural gas prices may fluctuate with changes in demand due to, among other things, the ongoing war in Ukraine, the Israel-Hamas conflict, rising tensions with Iran, 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 recession. To what extent these and other external factors (such as government action with respect to climate change regulation) ultimately impact 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.

We believe our diverse product and service offerings uniquely position KLXE to respond to a rapidly evolving marketplace where we can provide a comprehensive suite of engineered solutions for our customers with one call and one master services agreement.

How We Generate Revenue and the Costs of Conducting Our Business

Our business strategy seeks to generate attractive returns on capital by providing differentiated services and prudently applying our cash flow to select targeted opportunities, with the potential to deliver high returns that we believe offer superior margins over the long-term and short payback periods. Our services generally require equipment that is less expensive to maintain and is operated by a smaller staff than many other oilfield services 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 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 have generated margins superior to our competitors based upon the differential quality of our performance, and that these margins may 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.

Results of Operations

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

Revenue. The following is a summary of revenue by segment and product line for the periods indicated:

For the quarter ended September 30, 2024, revenues were $188.9, a decrease of $31.7, or 14.4%, as compared with the prior year period. The overall decrease in revenues reflects a decline in industry activity and pricing during the quarter, leading to lower demand and pricing for our services. Lower weighted average price contributed to approximately 47% of the $31.7 decrease, and lower weighted average volume contributed to the remaining approximately 53%. This decrease was driven entirely by a decrease in weighted average volume. On a segment basis, Rocky Mountains segment revenue decreased by $9.1 or 11.8%. Lower weighted average price contributed to approximately 54% of the dollar decrease, and lower weighted average volume contributed to the remaining approximately 46%. Southwest segment revenue decreased by $9.2 or 11.8%. This decrease was driven entirely by a decrease in weighted average volume. Northeast/Mid-Con segment revenue decreased by $13.4 or 20.4%. This decrease was driven entirely by a decrease in weighted average price.

Cost of sales. For the quarter ended September 30, 2024, cost of sales were $142.3, or 75.3% of sales, as compared to the three months ended September 30, 2023 of $166.2, or 75.3% of sales. Cost of sales as a percentage of revenues did not change during the quarter. The two largest components of cost of sales are labor and repair and maintenance. Although cost of sales as a percentage of revenues did not change, labor costs per employee decreased by 2.4% as compared with the three months ended September 30, 2023. Repair & maintenance costs as a percentage of revenues increased by 21.2% as compared to the three months ended September 30, 2023, largely due to the lower pricing during the quarter.

Selling, general and administrative expenses (“SG&A”). For the quarter ended September 30, 2024, SG&A expenses were $21.2, or 11.2% of revenues, as compared with $18.6, or 8.4% of revenues, in the prior year period. The increase in percentage of revenues is due to the more fixed cost nature of our SG&A costs which decreased at a slower pace than revenues, as SG&A has decreased on a dollar basis compared to the three months ended September 30, 2023.

Operating income (loss). The following is a summary of operating income (loss) by segment:

For the quarter ended September 30, 2024, operating income was $1.1 compared to operating income of $16.4 in the prior year period, primarily due to a reduction in activity and pricing.

The operating results across our three geographic segments declined as a function of lower revenues compared to the prior year period. Rocky Mountains segment operating income was $9.7, Southwest segment operating income was $0.7, and Northeast/Mid-Con segment operating income was $2.0 for the three months ended September 30, 2024. The operating loss for the Corporate and other segment was consistent with prior year.

Income tax expense. For the quarter ended September 30, 2024, income tax expense was $0.2, as compared to income tax expense of $0.3 in the prior year period, and was comprised primarily of state and local taxes. The Company did not recognize a federal tax benefit on its year-to-date losses because it has a valuation allowance against its deferred tax balances.

Net (loss) income. For the quarter ended September 30, 2024, net loss was $8.2, as compared to net income of $7.6 in the prior year period, decreasing primarily as a result of lower revenues as discussed above.

Results of Operations

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Revenue. The following is a summary of revenue by segment and product line for the periods indicated:

For the nine months ended September 30, 2024, revenues were $543.8, a decrease of $150.4, or 21.7%, as compared with the prior year period. The overall decrease in revenues reflects a decline in activity and pricing during the nine-month period, leading to lower demand for our services. Lower weighted average price contributed to approximately 20% of the $150.4 decrease, and lower weighted average volume contributed to the remaining approximately 80%. On a segment basis, Rocky Mountains segment revenue decreased by $36.4 or 17.2%. Lower weighted average price contributed to approximately 1% of the dollar decrease, and lower weighted average volume contributed to the remaining approximately 99%. Southwest segment revenue decreased by $29.6 or 12.5%. This decrease was driven entirely by a decrease in weighted average volume. Northeast/Mid-Con segment revenue decreased by $84.4 or 34.4%. Lower weighted average price contributed to approximately 68% of the dollar decrease, and lower weighted average volume contributed to the remaining approximately 32%.

Cost of sales. For the nine months ended September 30, 2024, cost of sales were $422.3, or 77.7% of sales, as compared to the nine months ended September 30, 2023 of $520.4, or 75.0% of sales. Cost of sales as a percentage of revenues increased primarily due to a decrease in pricing which led to lower operating leverage of fixed costs during the nine-month period ended September 30, 2024. The two largest components of cost of sales are labor and repair and maintenance. Although cost of sales as a percentage of revenues increased, labor costs per employee decreased by 10.9% as compared with the nine months ended September 30, 2023. Repair & maintenance costs as a percentage of revenues increased by 20.9% as compared to the nine months ended September 30, 2023, largely due to the lower pricing during the nine-month period.

Selling, general and administrative expenses (“SG&A”). For the nine months ended September 30, 2024, SG&A expenses were $62.1, or 11.4% of revenues, as compared with $66.8, or 9.6% of revenues, in the prior year period. The increase in percentage of revenues is due to the more fixed cost nature of our SG&A costs which decreased at a slower pace than revenues during the nine-month period, as SG&A has decreased on a dollar basis compared to the nine months ended September 30, 2023.

Operating (loss) income. The following is a summary of operating (loss) income by segment:

*NM = Not Meaningful

For the nine months ended September 30, 2024, operating loss was $10.6 compared to operating income of $54.9 in the prior year period, due primarily to a reduction in activity and pricing.

The operating results across our three geographic segments declined as a function of lower revenues compared to the prior year period. Rocky Mountains segment operating income was $19.0, Southwest segment operating income was $2.6, and Northeast/Mid-Con segment operating income was $1.9 for the nine months ended September 30, 2024. The operating loss for the Corporate and other segment decreased slightly due to non-recurring costs related to the Greene's Acquisition in the prior year.

Income tax expense. For the nine months ended September 30, 2024, income tax expense was $0.6, as compared to income tax expense of $0.2 in the prior year period, and was comprised primarily of state and local taxes. The Company did not recognize a federal tax benefit on its year-to-date losses because it has a valuation allowance against its deferred tax balances.

Net (loss) income. For the nine months ended September 30, 2024, net loss was $38.4, as compared to net income of $28.4 in the prior year period, decreasing primarily as a result of lower revenues as discussed above.

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 noteholders, borrowings under the Company’s asset-based revolving credit facility, as amended by the ABL Amendment (as defined below) and other amendments (the “ABL Facility”) and cash flows from operations. At September 30, 2024, we had $82.7 of cash and cash equivalents and $43.6 available on the September 2024 ABL Facility Borrowing Base Certificate, which resulted in a liquidity position of $126.3.

Our material cash commitments from known contractual and other obligations consist primarily of obligations for long-term debt and related interest as well as leases for property and equipment and purchase obligations as part of normal operations. See below “—ABL Facility” and “—Senior Secured Notes” for information regarding scheduled maturities of our long-term debt. See “Note 8 - Leases” of Item 8 in our 2023 Annual Report on Form 10-K filed with the SEC on March 8, 2024 for information regarding scheduled maturities of our operating and financing leases.

We have taken several actions to continue to improve our liquidity position, including closing our Florida legacy headquarters and relocating all key functions to Houston, eliminating redundancies and duplicative functions throughout our operations following the QES Merger, issuing equity under our ATM Offering, executing debt-for-equity exchanges that have reduced our interest burden and monetizing non-core and obsolete assets. We actively manage our capital spending and are focused primarily on required maintenance spending. Additionally, ongoing volatility in commodity prices and increased inflation continue to affect our financial results. We believe that based on our current forecasts, our cash on hand, together with our operating cash flows, will provide us with the ability to fund our operations, including planned capital expenditures, for the next twelve months.

We have substantial indebtedness. As of September 30, 2024, we had total outstanding long-term indebtedness of $285.2 under our ABL Facility and 11.5% senior secured notes due 2025 (the “Senior Secured Notes”) as described in greater detail under “—ABL Facility” and “—Senior Secured Notes” below, including $50.0 in current portion of long-term indebtedness. Our ABL Facility matures on the ABL Maturity Date (as defined below) and our Senior Secured Notes mature on November 1, 2025. Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend on our financial condition and future operating performance and our ability to refinance our debt as it becomes due, which in turn 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 and related pricing for our services, increasing inflation and government efforts to reduce inflation, the condition of the public and private debt markets and the willingness of capital providers to lend to our industry, and other financial and business factors, many of which are beyond our control.

As of September 30, 2024, we do not have enough cash on hand to redeem the $237.3 principal amount of Senior Secured Notes due November 1, 2025. The Company currently plans to satisfy these obligations by refinancing part or all of the Senior Secured Notes, including potentially using in part its cash reserves, seeking additional sources of capital, selling assets or a combination thereof. Any refinancing of our debt may involve the issuance of additional equity or convertible debt securities that could result in dilution to the Company’s stockholders. The Company’s ability to successfully execute these plans is dependent on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and certain financial, business and other market factors, many of which are beyond the Company’s control. 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. In addition, incurring additional debt in excess of our existing outstanding indebtedness would result in increased interest expense and financial leverage.

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 the ABL Facility 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 our 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 September 30, 2024 and classified as a current liability given the current maturity date. The effective interest rate under the ABL Facility was approximately 7.9% on September 30, 2024.

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”).

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 Secured 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. As of September 30, 2024, the balance outstanding under the ABL Facility has been classified as a current liability.

The ABL Facility includes a springing financial covenant which requires the Company’s consolidated fixed charge coverage ratio (“FCCR”) to be at least 1.0 to 1.0 if availability falls below the greater of $15.0 or 20.0% of the line cap. At all times during the three months ended September 30, 2024, availability exceeded this threshold, and the Company was not subject to this financial covenant. As of September 30, 2024, the FCCR was below 1.0 to 1.0, and the Company was in full compliance with the ABL Facility.

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 Secured Notes

In conjunction with the acquisition of Motley in 2018, we issued $250.0 principal amount of the Senior Secured Notes offered pursuant to Rule 144A under the Securities Act of 1933 (as amended, 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 Secured Notes, total debt related to the Senior Secured Notes as of September 30, 2024 was $235.2. The Senior Secured Notes bear interest at an annual rate of 11.5%, payable semi-annually in arrears on May 1 and November 1 and mature in 2025. Accrued interest related to the Senior Secured Notes was $11.4 as of September 30, 2024.

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.

Indemnities, Commitments and Guarantees

In the normal course of our business, we make certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to other parties to certain acquisition agreements. The duration of these indemnities, commitments and guarantees varies and, in certain cases, is indefinite. Many of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events that are not reasonably determinable. Our management believes that any liability for these indemnities, commitments and guarantees would not be material to our financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.

We have employment agreements with certain key members of management expiring on various dates. Our employment agreements generally provide for certain protections in the event of a change of control. These protections generally include the payment of severance and related benefits under certain circumstances in the event of a change in control.

Capital Expenditures

Our capital expenditures were $49.8 during the nine months ended September 30, 2024, compared to $44.3 in the nine months ended September 30, 2023. Based on current industry conditions and our significant investments in capital expenditures over the past several years, we expect to incur between $55.0 and $60.0 in total capital expenditures for the year ending December 31, 2024, out of which approximately 80% is budgeted 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 an Equity Distribution Agreement (as amended from time to time, the “Equity Distribution Agreement”) with Piper Sandler & Co. as sales agent (the “Agent”). Pursuant to the terms of the Equity Distribution Agreement, the Company may sell from time to time through the Agent (the “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 Amendment No. 1 to the Equity Distribution Agreement (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. Under the terms of the Equity Distribution Agreement, the Company will pay the Agent a commission equal to 3.0% of the gross sales price of the Common Stock sold.

Shares of Common Stock offered and sold in the ATM Offering were issued pursuant to the Company’s shelf registration statement on Form S-3 (Registration No. 333-256149) filed with the SEC on May 14, 2021 and declared effective on June 11, 2021 (the “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. The Registration Statement expired on June 11, 2024 pursuant to Rule 415(a)(5) under the Securities Act. Sales under the ATM Offering program may restart when and if the Company files a prospectus supplement under a successor registration statement.

The Company used the net proceeds from the ATM Offering, after deducting the Agent’s commissions and the Company’s offering expenses, for general corporate purposes, which included funding acquisitions, capital expenditures and working capital.

During the three and nine months ended September 30, 2024, the Company did not sell any shares of Common Stock and incurred legal and administrative fees of $— and $0.2, respectively.

During the three and nine months ended September 30, 2023, the Company did not sell any shares of Common Stock and incurred legal and administrative fees of $0.3 and $0.4, respectively.

Cash Flows

Our cash flows provided by operating activities for the nine months ended September 30, 2024 were approximately $28.2 as compared to approximately $77.0 provided by operating activities for the nine months ended September 30, 2023. Our operating cash flows are sensitive to many variables, the most significant of which are utilization and profitability, the timing of billing and customer collections, payments to our vendors, repair and maintenance costs and personnel, any of which may affect our available cash. Additionally, should our customers experience financial distress for any reason, they could default on their payments owed to us, which would affect our cash flows and liquidity.

At September 30, 2024, we had $82.7 of cash and cash equivalents. Cash on hand at September 30, 2024 decreased by $29.8, as a result of $28.2 of cash flows provided by operating activities, $40.6 of cash flows used in investing activities and $17.4 used in financing activities. Our liquidity requirements consist of working capital needs, debt service obligations and ongoing capital expenditure requirements. Our primary requirements for working capital are directly related to the activity level of our operations.

The following table sets forth our cash flows for the periods presented below:

Net cash provided by operating activities

Net cash provided by operating activities was $28.2 for the nine months ended September 30, 2024, as compared to net cash provided by operating activities of $77.0 for the nine months ended September 30, 2023. The lower operating cash flows were attributable to the change from a net income to a net loss position, partially offset by higher depreciation and amortization in 2024.

Net cash used in investing activities

Net cash used in investing activities was $40.6 for the nine months ended September 30, 2024, as compared to net cash used in investing activities of $29.9 for the nine months ended September 30, 2023. The cash flows used in investing activities for the nine months ended September 30, 2024 were primarily driven by maintenance capital spending tied to the operation of our existing asset base offset by sales of property and equipment.

Net cash used in financing activities

Net cash used in financing activities was $17.4 for the nine months ended September 30, 2024, compared to net cash used in financing activities of $14.1 for the nine months ended September 30, 2023. During the nine months ended September 30, 2024, there were no additional borrowings under our ABL Facility and no sales under our ATM program.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with 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. We believe that our critical accounting policies are limited to those described in the Critical Accounting Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2023 Annual Report on Form 10-K filed with the SEC on March 8, 2024.

Recent Accounting Pronouncements

We continue to evaluate any recently issued accounting pronouncements for future adoption. See Note 2 - Recent Accounting Pronouncements above for upcoming adoptions of new 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 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.

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures that are designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, (as amended, the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers (who are our Chief Executive Officer and Chief Financial Officer, respectively), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.

In connection with the preparation of this Quarterly Report for the quarter ended September 30, 2024, an evaluation was performed under the supervision of and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that its disclosure controls and procedures were effective as of September 30, 2024.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected or, are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the information set forth in this Quarterly Report, you should carefully consider the risk factors previously described in Part I, Item IA. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.