Kirby Corporation 2018 Form 10-K Summary
Business context and reporting period
Kirby Corporation filed its Form 10-K for the fiscal year ended December 31, 2018. Kirby operates two segments: marine transportation and distribution and services. Marine transportation is the largest U.S. domestic tank-barge operation, while distribution and services provides engine, transmission and equipment parts, repair, rental, and oilfield equipment manufacturing services.
The filing includes fourth-quarter results and annual comparisons with 2017 and 2016. The 2018 results reflect the February 2018 Higman acquisition, the May 2018 acquisition of Targa’s pressure-barge business, and the continuing integration of Stewart & Stevenson, acquired in September 2017.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2.971 billion | $2.214 billion | +34% |
| Operating income | $155.3 million | $93.6 million | +66% |
| Operating margin | Approximately 5.2% | Approximately 4.2% | Improved |
| Net earnings attributable to Kirby | $78.5 million | $313.2 million | -75% |
| Diluted EPS | $1.31 | $5.62 | -77% |
| Cash flow from operations | $347.0 million | $353.4 million | -2% |
| Capital expenditures | $301.9 million | $177.2 million | +70% |
| Long-term debt, including current portion | $1.410 billion | $992.4 million | +42% |
| Total assets | $5.872 billion | $5.127 billion | +15% |
Net margin was approximately 2.6% in 2018 versus approximately 14.1% in 2017, heavily affected by 2017’s $269.5 million after-tax deferred-tax remeasurement benefit and 2018 impairment and other special charges. Cash and cash equivalents were $7.8 million at year-end, compared with $20.1 million in 2017.
- Marine transportation: Revenue increased 12% to $1.483 billion and operating income increased 9% to $147.4 million. The operating margin declined to 9.9% from 10.2%.
- Distribution and services: Revenue increased 67% to $1.488 billion and operating income increased 50% to $129.3 million. The operating margin declined to 8.7% from 9.7%.
- Marine utilization: Inland utilization generally remained in the high-80% to mid-90% range; coastal utilization improved into the 80% range but remained constrained by industry overcapacity.
- Debt and liquidity: Year-end debt consisted primarily of $417.4 million drawn on the $850 million revolving facility, $500 million of 2028 notes, and $500 million of senior notes due in 2020 and 2023. Approximately $425.8 million remained available under the revolving facility at year-end.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by Higman, Targa’s pressure barges, the full-year contribution from Stewart & Stevenson, stronger inland barge utilization, improved inland spot pricing, and higher oilfield equipment activity.
- Marine revenue mix shifted toward inland operations, which represented 76% of marine revenue versus 70% in 2017. Inland revenue under term contracts declined to approximately 65% from 75%, increasing exposure to spot-market volatility.
- Distribution and services benefited from oilfield equipment manufacturing, pressure-pumping-unit activity, engine and parts sales, and improved marine diesel repair demand. Supply-chain constraints delayed some engine, transmission and equipment deliveries but were largely resolved in the fourth quarter.
- Interest expense more than doubled to $46.9 million from $21.5 million, reflecting acquisition-related borrowings and higher average debt.
- Inventories increased 61% to $507.4 million, primarily to support increased oilfield activity. The company adopted ASC 606 using the modified retrospective method, reducing opening retained earnings by $9.7 million and changing the timing of contract-manufacturing revenue recognition.
Guidance, outlook, risks and unusual items
- 2019 outlook: Management expects inland utilization in the low-to-mid-90% range, higher inland revenue and operating income, and modest improvement in coastal utilization into the low-to-mid-80% range. Coastal pricing is expected to improve at low-to-mid-single-digit rates on most renewing contracts.
- Distribution and services outlook: Recent oilfield activity declines and crude-oil price volatility are expected to reduce some engine, transmission and parts demand in 2019. Existing pressure-pumping-unit backlog is expected to support manufacturing activity through at least the first half of 2019. Commercial and industrial revenue and operating income are expected to increase.
- 2019 capital spending: Projected at $225 million to $245 million, funded through operating cash flow and available borrowing capacity.
- Cenac acquisition: Kirby agreed in January 2019 to acquire Cenac’s marine fleet for approximately $244 million, financed with additional borrowings. Closing was expected in March 2019 after early termination of the Hart-Scott-Rodino waiting period.
- Impairments and charges: Fourth-quarter 2018 included $82.7 million of non-cash long-lived-asset impairment, $2.7 million of goodwill impairment, and $2.4 million of lease-cancellation costs. The long-lived-asset charge primarily related to four older articulated tank-barge units that Kirby plans to retire because of ballast-water-management-system costs. The 2018 second quarter also included an $18.1 million non-deductible retirement expense for the former executive chairman.
- Internal controls: Management concluded that internal control over financial reporting was ineffective at December 31, 2018 because of a material weakness involving user-access controls at a recently acquired subsidiary. KPMG issued an adverse opinion on internal control effectiveness but an unqualified opinion on the consolidated financial statements. Kirby expected remediation in the second quarter of 2019.
- Principal risks: Risks include marine accidents and spills, weather and lock disruptions, aging inland-waterway infrastructure, tank-barge oversupply, fuel-price volatility, Jones Act or environmental-regulation changes, ballast-water compliance costs, oilfield cyclicality, customer and supplier concentration, labor availability, cyber incidents, acquisition integration, and higher leverage.
- Contingencies: The company is involved in several environmental and legal matters, including CERCLA sites and litigation related to the 2016 Nathan E. Stewart grounding. Potential exposure in the Canadian proceedings was not estimable, although management believes insurance and reserves are adequate.
Most important facts for investors to verify
- Whether the 2018 earnings decline is appropriately normalized for impairments, the executive-chairman retirement charge, acquisition costs, accounting changes, and the unusually large 2017 tax benefit.
- Progress in remediating the material weakness in acquired-subsidiary IT access controls and whether any subsequent misstatements or control deficiencies emerge.
- Post-acquisition utilization, pricing, integration costs, and returns from Higman, Targa, Stewart & Stevenson, CGBM, and the pending Cenac transaction.
- Debt reduction capacity, refinancing of the $150 million Series A notes due in February 2020, interest-rate exposure, and covenant compliance after additional acquisition borrowing.
- Actual 2019 inland and coastal utilization, contract renewal rates, spot-market exposure, industry barge additions and retirements, and ballast-water compliance expenditures.
- Whether oilfield activity, crude-oil prices, pressure-pumping demand, inventory levels, and customer backlogs support the distribution and services outlook.
- Developments in environmental claims, spill-related proceedings, pension funding, and other commitments disclosed in the filing.