KLX Energy Services Holdings, Inc.KLXE
KLX Energy Services Holdings, Inc. Goodwill & Intangibles Disclosure
Goodwill and Intangible Assets, Net
The following sets forth the intangible assets by major asset class, all of which were acquired through business purchase transactions:
| January 31, 2021 | January 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Useful Life (Years) | Original Cost | Accumulated Amortization | Net Book Value | Original Cost | Accumulated Amortization | Net Book Value | |||||||||||||||||||||||||||||||||||
Customer contracts and relationships (1) | 10 | $ | 5.7 | $ | 3.2 | $ | 2.5 | $ | 43.0 | $ | 2.4 | $ | 40.6 | ||||||||||||||||||||||||||||
| Covenants not to compete | 1.5 - 3 | 0.5 | 0.5 | — | 4.7 | 1.9 | 2.8 | ||||||||||||||||||||||||||||||||||
| Developed technologies | 15 | — | — | — | 3.3 | 0.9 | 2.4 | ||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | 6.2 | $ | 3.7 | $ | 2.5 | $ | 51.0 | $ | 5.2 | $ | 45.8 | |||||||||||||||||||||||||||||
(1) The customer contracts and relationships intangible asset’s useful life was reduced from 20 to 10 years as of July 31, 2020.
Amortization expense associated with intangible assets was $4.0 and $3.9 for the year ended January 31, 2021 and 2020, respectively. During the year ended January 31, 2021, accelerated amortization of $2.7 was recognized related to the Company’s customer contracts and relationships long-lived intangible. Due to the accelerated amortization of intangible assets, the Company does not expect to recognize future material amortization expense related to intangible assets. Actual future amortization expense may be different due to future acquisitions, impairments, changes in amortization periods or other factors.
During the second quarter 2020 review of the customer relationship intangible assets, an analysis of the future contributions to revenue from these customers resulted in forecast declines of approximately 50%. As a result of the review, the Company recognized a charge of $2.7 reflecting accelerated amortization to reduce the carrying value of its customer relationships intangible. The accelerated amortization charge is included in the consolidated statement of operations for the year ended January 31, 2021.
Goodwill and indefinite life intangible assets are tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. The oilfield service industry experienced an abrupt deterioration in demand during the second half of 2019, which continued into 2020. During the first quarter of 2020, the novel coronavirus (“COVID-19”) pandemic emerged and applied significant downward pressure on the global economy and oil demand and prices, leading North American operators to announce significant cuts to planned 2020 capital expenditures. The combination of the COVID-19 pandemic and supply concerns drove a steep drop in oil prices, which led to decreases in demand for the Company’s services and lower current and expected revenues for the Company.
Based on the impairment indicators above, the Company performed a goodwill and long-lived asset impairment analysis as of the April 30, 2020. The results of the impairment analysis concluded that the carrying amount of the long-lived assets exceeded the relative fair values of two of the reporting units asset groups. As a result, the Company recorded a $180.4 long-lived asset impairment charge, $39.2 related to intangible assets and $141.2 related to property and equipment, which is included in the consolidated statement of operations for the year ended January 31, 2021. This charge reflects $91.3 and $89.1 of the long-lived assets attributable to the Southwest and Northeast/Mid-Con segments, respectively.
Determining fair value requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating profit margins, weighted average cost of capital, terminal growth rates, future market share and future market conditions, among others. The Company’s cash flow projections were a significant input into the April 30, 2020 fair values. See Note 10 for additional information regarding the fair value determination. If the Company continues to be unable to achieve projected results or long-term projections are adjusted downward, it could negatively impact future valuations of the Company’s long-lived assets.
The valuation of the Company and its reportable segments’ goodwill impairment test was estimated using the guideline public company analysis and the discounted cash flow analysis, which were equally weighted in the fair value analysis. See Note 10 for additional information regarding the fair value determination. The results of the goodwill impairment test as of April 30, 2020 indicated that goodwill was impaired because the carrying value of the Rocky Mountains reporting unit exceeded its relative fair value. Accordingly, the Company recorded a $28.3 goodwill impairment charge, which is included in the consolidated statement of operations for the year ended January 31, 2021. This charge reflects the full value of the goodwill attributable to the Rocky Mountains segment, leaving the Company with no goodwill as of January 31, 2021.
The Company recorded a $47.0 goodwill impairment charge during the year ended January 31, 2020, which is included in the consolidated statements of operations. The charges reflect the full value of the goodwill attributable to the Northeast/Mid-Con and Southwest segments.
The changes in the carrying amount of goodwill for the years ended January 31, 2021 and 2020 are as follows:
| Balance, January 31, 2019 | $ | 43.2 | |||
| Acquisitions | 31.8 | ||||
| Purchase price adjustments | 0.3 | ||||
| Goodwill impairment | (47.0) | ||||
| Balance, January 31, 2020 | 28.3 | ||||
| Goodwill impairment | (28.3) | ||||
| Balance, January 31, 2021 | $ | — | |||
About Goodwill & Intangibles Disclosures
Goodwill and intangible asset disclosures reveal the premium paid in acquisitions and how management assesses whether that premium retains its value. Since goodwill is no longer amortized under US GAAP, the annual impairment test is the only mechanism that adjusts carrying values downward — making the assumptions behind that test critically important for investors.
Key signals: a history of goodwill impairments suggests management consistently overpays for acquisitions. Watch the gap between reporting unit fair value and carrying amount — when fair value exceeds carrying amount by less than 10-20%, a small decline in business performance could trigger a write-down. For finite-lived intangibles, examine useful life assumptions across customer relationships, technology, and trade names; aggressive estimates inflate near-term earnings. Compare total intangibles-to-total-assets ratios against peers to assess acquisition dependency. Rising goodwill as a percentage of equity can signal balance sheet fragility.