KLX Energy Services Holdings, Inc.KLXE
KLX Energy Services Holdings, Inc. Income Taxes Disclosure
Income Taxes
Income tax expense consisted of the following:
| Year Ended | ||||||||||||||
| December 31, 2024 | December 31, 2023 | |||||||||||||
| Current: | ||||||||||||||
| Federal | $ | (0.3) | $ | 2.3 | ||||||||||
| State | 0.9 | 1.3 | ||||||||||||
| Total current income tax expense | $ | 0.6 | $ | 3.6 | ||||||||||
| Deferred: | ||||||||||||||
| Federal | $ | — | $ | (0.6) | ||||||||||
| State | — | — | ||||||||||||
| Total deferred income tax expense (benefit) | — | (0.6) | ||||||||||||
| Total income tax expense | $ | 0.6 | $ | 3.0 | ||||||||||
A reconciliation of income tax expense using the federal statutory income tax rate of 21% to the actual income tax consists of the following:
| Year Ended | |||||||||||
| December 31, 2024 | December 31, 2023 | ||||||||||
| Income tax (benefit) expense at statutory rate | $ | (11.0) | $ | 4.6 | |||||||
| State income taxes, net of federal tax benefit | 0.7 | 1.1 | |||||||||
| Valuation allowance | 9.5 | (6.4) | |||||||||
| Adjustments to prior year tax accruals | (0.3) | 2.2 | |||||||||
| Stock based compensation | 0.1 | (0.1) | |||||||||
| Non-deductible meals and entertainment | 1.3 | 1.4 | |||||||||
| Officer compensation | 0.3 | 0.6 | |||||||||
| Bargain purchase gain | — | (0.5) | |||||||||
| Other | — | 0.1 | |||||||||
| Total income tax expense | $ | 0.6 | $ | 3.0 | |||||||
Income tax expense was $0.6 for the year ended December 31, 2024, which reflects an effective tax rate of approximately (1.1)%. For the fiscal year ended December 31, 2024, the Company recognized current state tax expense on its year-to-date income of $0.9, primarily related to Texas franchise tax, less a federal tax adjustment of $(0.3) to the prior year accrual. For the fiscal year ended December 31, 2023, the Company recognized current federal tax expense on its year-to-date income of $0.3 and $1.1 of state income tax, primarily related to Texas franchise tax, less a deferred tax benefit of $(0.6), primarily due to the bargain purchase gain related to the Greene's Acquisition. In addition, the Company recognized $2.0 of federal tax expense and $0.2 of state income tax expense for the fiscal year ended December 31, 2022.
The tax effects of temporary differences and carryforwards that give rise to deferred income tax assets and liabilities consisted of the following:
| Year Ended | |||||||||||
| December 31, 2024 | December 31, 2023 | ||||||||||
| Deferred tax assets: | |||||||||||
| Intangible assets | $ | 57.6 | $ | 74.1 | |||||||
| Net operating loss carryforward | 195.0 | 180.1 | |||||||||
| Operating lease liabilities | 4.8 | 5.4 | |||||||||
| Interest expense limitation | 23.3 | 10.3 | |||||||||
| Other | 6.8 | 7.0 | |||||||||
| 287.5 | 276.9 | ||||||||||
| Deferred tax liabilities: | |||||||||||
| Operating lease assets | (4.6) | (5.2) | |||||||||
| Depreciation | (16.4) | (16.4) | |||||||||
| Other | (1.2) | (1.1) | |||||||||
| (22.2) | (22.7) | ||||||||||
| Net deferred tax asset before valuation allowance | $ | 265.3 | $ | 254.2 | |||||||
| Valuation allowance | (265.2) | (254.1) | |||||||||
| Net deferred tax asset | $ | 0.1 | $ | 0.1 | |||||||
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss that existed for the three-year period ended December 31, 2024. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
On the basis of this evaluation, as of December 31, 2024 and December 31, 2023, a valuation allowance of $265.2 and $254.1 has been recorded, respectively, to recognize only the portion of the deferred tax assets that are more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if additional objectively verifiable positive evidence materializes in future reporting periods, such as a demonstrated operating profitability. The change in the valuation allowance from December 31, 2023 was a net increase of $11.1, which is primarily due to the current year operating loss plus prior year adjustments. The valuation allowance recorded is exclusive of the $0.1 relating to the Texas franchise tax, which the Company expects to fully realize.
Internal Revenue Code (“IRC”) Section 382 provides an annual limitation with respect to the ability of a corporation to utilize its net operating loss and other tax attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership. The Company had an ownership change during 2020. As a result, the Company's pre-ownership change net operating loss carryforwards and recognized built-in-losses are subject to an annual limitation, which will significantly restrict its ability to use the net operating losses and recognized built-in-losses to offset taxable income in periods following the ownership change. The Company is limited to an approximate $0.5 annual limitation on its pre-change net operating loss carryforwards and recognized built-in-losses.
In addition, on July 28, 2020, the Company completed the all stock QES Merger, in which QES became a wholly owned subsidiary of the Company. The QES Merger resulted in an ownership change under IRC Section 382 of the historical QES net operating losses and other tax attributes. QES's pre-merger net operating losses and other tax attributes are subject to an annual limitation of $0.3.
The Company has U.S. federal net operating loss carryforwards of $840.2 and $780.0, for the fiscal years ended December 31, 2024 and December 31, 2023, respectively. Of these net operating losses, $724.1 is subject to an IRC Section 382 limitation, excluding $12.1 that will expire between 2029 and 2037 that the Company believes will not be utilized. The Company also has state net operating loss carryforwards of $269.3 for the fiscal year ended December 31, 2024, and $291.7 for the fiscal year ended December 31, 2023, which begin to expire for tax years ending in 2028. The Company's ability to utilize the state net operating loss carryforwards may be limited according to state law and conformity to the IRC Section 382 limitation.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based not only on the technical merits of the tax position based on tax law, but also the past administrative practices and precedents of the taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company had no unrecognized tax benefits for the years ended December 31, 2024 and December 31, 2023.
The Company is subject to taxation in the United States and various states. Tax years that remain subject to examinations by major tax jurisdictions are generally open for tax years beginning in 2020 and after.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2024 | Mar 13, 2025 | Showing above |
| 2021 | Apr 28, 2021 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.