Kirby Corporation 2018 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation, the largest domestic tank barge operator in the United States, filed its unaudited Form 10-Q for the quarter ended March 31, 2018. The company operates two reportable segments: Marine Transportation and Distribution and Services. The quarter included the February 14, 2018 acquisition of Higman Marine and the continuing impact of the September 2017 acquisition of Stewart & Stevenson.
- Marine Transportation operated 993 inland tank barges with 21.9 million barrels of capacity, 55 coastal tank barges, 50 coastal tugboats and an average of 262 inland towboats.
- Distribution and Services provides engine, transmission and equipment parts and services, rentals, and oilfield equipment manufacturing and remanufacturing.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $741.7 million | $491.7 million | +51% |
| Operating income | $50.7 million | $46.0 million | +10% |
| Earnings before taxes | $42.5 million | $41.0 million | +4% |
| Net earnings attributable to Kirby | $32.5 million | $27.5 million | +18% |
| Diluted EPS | $0.54 | $0.51 | +6% |
| Operating margin | 6.8% | 9.4% | Down 260 bps |
- Marine Transportation revenue declined 1% to $340.4 million; operating income declined 55% to $16.2 million and operating margin fell to 4.8% from 10.4%.
- Distribution and Services revenue increased 171% to $401.3 million; operating income increased 170% to $37.0 million. Segment margin was 9.2% versus 9.3%.
- Operating results included $3.3 million of Higman transaction costs, $2.9 million of severance and retirement costs, and $3.9 million of noncash stock-award-plan amendment expense.
- Interest expense increased to $9.8 million from $4.5 million, primarily due to acquisition-related borrowings.
- Net cash provided by operating activities was $18.7 million, down from $85.2 million, primarily because receivables and inventories increased with higher business activity.
- Capital expenditures were $46.4 million on the balance sheet, while cash-flow capital expenditures were $41.0 million. Acquisition-related investing cash outflows were $430.0 million.
- Cash and cash equivalents were $7.0 million at March 31, 2018, compared with $20.1 million at December 31, 2017.
- Total debt outstanding was approximately $1.9 billion, including $500.0 million of 2028 Notes, $500.0 million of Senior Notes, $423.1 million under the revolving facility and $8.3 million under the Credit Line. Debt-to-capitalization increased to 31.2% from 24.2% at year-end.
- As of May 3, 2018, availability was $444.4 million under the revolving facility and $8.9 million under the Credit Line.
Material Changes Versus the Prior Comparable Period
- Higman added 161 inland tank barges and 75 inland towboats, materially increasing Marine Transportation assets and capacity.
- The $421.9 million Higman acquisition was funded primarily with $500.0 million of 4.2% senior unsecured notes due March 1, 2028.
- Distribution and Services benefited from the Stewart & Stevenson acquisition and substantially stronger oilfield-service demand, particularly for pressure-pumping equipment remanufacturing and manufacturing.
- Marine Transportation performance was pressured by lower term-contract pricing, lower coastal spot pricing, excess coastal capacity, higher fuel costs and adverse weather and water conditions.
- Marine utilization improved: inland utilization reached the mid-90% range and coastal utilization reached the high-70% range.
- ASC 606 was adopted on January 1, 2018 under the modified retrospective method, reducing opening retained earnings by $9.7 million. Contract-manufacturing revenue is now generally recognized upon shipment rather than using percentage-of-completion accounting.
- Reported first-quarter 2018 Distribution and Services revenue was $401.3 million; without ASC 606, the filing indicates revenue would have been $428.6 million and operating income $56.5 million.
- Early adoption of ASU 2018-02 reclassified $7.9 million from accumulated other comprehensive income to retained earnings for stranded tax effects from tax reform.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2018 capital expenditures of $200 million to $225 million, funded through operating cash flow and available credit.
- Management expected inland utilization in the low- to mid-90% range for 2018 and anticipated modest mid-single-digit pricing improvement on inland term contracts renewed in the second half of 2018.
- Coastal utilization was expected to remain in the high-70% to low-80% range, with excess industry capacity continuing to pressure the market.
- Distribution and Services demand was expected to remain strong in oilfield equipment remanufacturing and manufacturing, while commercial and industrial demand was expected to improve.
- Supply-chain delays for engines, transmissions and parts constrained Distribution and Services activity and delayed revenue recognition.
- On May 1, 2018, Kirby agreed to acquire Targa Resources’ inland marine tank barge business for approximately $69.3 million in cash, subject to customary closing conditions.
- Executive Chairman Joseph H. Pyne retired from his executive role effective April 30, 2018. The company expects an $18.1 million, approximately $0.30 per share, one-time nondeductible expense in the second quarter for a bonus and accelerated equity vesting.
- Key risks include marine accidents, environmental liabilities, weather and navigational disruptions, fuel costs, interest rates, industry overcapacity, customer and energy-market cycles, supply-chain constraints, acquisition integration and compliance with debt covenants.
- The company reported adequate reserves and insurance coverage for disclosed pollution and marine incidents and did not expect them to materially affect financial condition. Guarantees, letters of credit and performance bonds totaled $20.3 million at March 31, 2018.
Important Facts for Investors to Verify
- Integration progress, earnings contribution and final purchase-price accounting for Higman.
- Whether inland pricing improvement and high utilization offset continued coastal overcapacity and lower contract rates.
- Operating cash-flow conversion as receivables and inventories normalize.
- Debt reduction plans, interest-rate exposure and continued compliance with revolving-facility and note covenants.
- Revenue and margin comparability after adoption of ASC 606, including the timing of contract-manufacturing revenue.
- Completion and financial impact of the proposed Targa acquisition.
- The second-quarter impact of the $18.1 million Pyne retirement-related expense.
- Progress on the $200 million to $225 million 2018 capital-expenditure program and the company’s ability to fund it without materially increasing leverage.