Kirby Corporation 2017 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. Kirby operates two reportable segments: Marine Transportation, which transports bulk liquid products by tank barge and towboat, and Distribution and Services, which provides equipment, parts, repair, rental, manufacturing and remanufacturing services.
At September 30, 2017, Kirby operated 848 inland tank barges with 17.4 million barrels of capacity, 67 coastal tank barges with 6.2 million barrels of capacity, and related tugboats and offshore equipment. The Distribution and Services segment was materially expanded by the September 13, 2017 acquisition of Stewart & Stevenson LLC.
Financial Performance and Key Metrics
| Metric | Q3 2017 | Q3 2016 | Nine Months 2017 | Nine Months 2016 |
|---|---|---|---|---|
| Total revenue | $541.3 million | $434.7 million | $1,506.3 million | $1,335.0 million |
| Operating income | $53.4 million | $56.2 million | $146.4 million | $188.4 million |
| Net earnings attributable to Kirby | $28.6 million | $32.0 million | $81.9 million | $109.1 million |
| Diluted EPS | $0.52 | $0.59 | $1.50 | $2.02 |
| Operating margin | 9.9% | 12.9% | 9.7% | 14.1% |
| Net cash from operating activities | Not separately provided | Not separately provided | $259.5 million | $338.2 million |
Marine Transportation revenue declined 11% in both the quarter and nine-month period. Segment operating income fell 35% in the quarter and 46% year to date, with margins declining to 11.3% and 10.8%, respectively, from 15.4% and 17.7%.
Distribution and Services revenue increased 194% in the quarter and 134% year to date. Segment operating income increased to $22.0 million in the quarter and $52.1 million year to date, compared with $4.6 million and $1.9 million in the prior-year periods. Segment margins improved to 9.9% and 10.2% from 6.1% and 0.8%.
Cash used in investing activities was $554.9 million, including $451.2 million for acquisitions and marine equipment and $133.4 million of capital expenditures, partially offset by $29.7 million of asset-sale proceeds. Financing activities provided $294.7 million, primarily from borrowings under the revolving credit facility. Cash declined modestly to $4.8 million from $5.6 million at December 31, 2016.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 25% in the quarter and 13% year to date, primarily because of the Stewart & Stevenson acquisition and stronger land-based oilfield-related activity.
- Net earnings attributable to Kirby decreased 11% in the quarter and 25% year to date; diluted EPS declined 12% and 26%, respectively.
- Marine results were pressured by industry-wide excess tank-barge capacity, lower contract pricing, reduced coastal utilization, increased idle time and hurricane-related disruption.
- Distribution and Services benefited from stronger demand for pressure-pumping equipment remanufacturing, transmission overhauls, equipment manufacturing, parts and rental services.
- The September 2017 Stewart & Stevenson acquisition had a total transaction value of approximately $758.2 million before post-closing adjustments and transaction fees. Consideration included $378.0 million of cash, $366.6 million of Kirby stock and $13.7 million of assumed debt.
- Total assets increased 21% to $5.20 billion, goodwill increased 54% to $919.3 million, and total equity increased 19% to $2.88 billion.
- The company adopted ASU 2016-09, resulting in an $8.5 million reduction to retained earnings. It also adopted the deferred-tax classification standard retrospectively.
- The pension plan was amended to cease benefit accruals for certain participants after May 31, 2017, reducing the projected benefit obligation by $33.4 million.
Debt, Liquidity and Capital Resources
- Total debt outstanding was approximately $1.03 billion at September 30, 2017, compared with $722.8 million at December 31, 2016. The reported debt-to-capitalization ratio increased to 26.4% from 23.1%.
- The revolving credit facility was increased from $550 million to $850 million and extended to June 26, 2022. Kirby had $524.4 million outstanding under the facility and was in compliance with its covenants.
- Kirby had $500 million of unsecured senior notes: $150 million due in 2020 at 2.72% and $350 million due in 2023 at 3.29%.
- As of November 7, 2017, the company reported $321.2 million of availability under the revolving facility and $8.8 million under its separate $10 million credit line.
- Future capital expenditures are expected to be funded through operating cash flow and available revolving-credit capacity.
Guidance, Outlook, Risks and Unusual Items
Kirby projected 2017 capital expenditures of $175 million to $185 million. The program includes new inland barges and towboats, coastal tug and articulated tug-barge construction, and upgrades to marine and Distribution and Services facilities.
Management expected fourth-quarter 2017 inland tank-barge utilization in the mid-80% to mid-90% range and coastal utilization in the low-to-mid 60% range. Management did not expect meaningful marine pricing improvement during 2017 because of excess capacity, additional competitive vessel supply and weak crude-oil and condensate transportation volumes.
Management expected continued strength in pressure-pumping unit remanufacturing and transmission overhauls, while hurricane-related rental-generator demand was expected to normalize. The Gulf of Mexico oilfield-services market and inland and coastal marine markets were expected to remain weak.
- Hurricanes Harvey and Irma negatively affected third-quarter results; management estimated a net adverse impact of approximately $0.03 per share, partly offset by customer recoveries and post-storm demand.
- Acquisition-related costs were $1.5 million for the first nine months, including $764,000 in the third quarter.
- On October 20, 2017, Kirby acquired assets of Sneed Shipbuilding, including a Channelview, Texas shipyard, for $14.9 million in cash, financed through the revolving facility. The purchase-price allocation was not complete.
- Kirby faces claims and investigations related to the 2016 grounding of the tug Nathan E. Stewart and the 2014 Miss Susan collision and fuel discharge. Management believes insurance coverage and recorded reserves are adequate.
- Guarantees, letters of credit and performance bonds had an aggregate notional value of $30.5 million. Management did not expect material cash outlays under these instruments.
- Key risks include marine oversupply and pricing pressure, weather and navigation disruptions, fuel and interest-rate volatility, environmental and accident liabilities, cyclical oilfield demand, acquisition integration and the ability to maintain debt covenants.
Most Important Facts for Investors to Verify
- Whether Stewart & Stevenson can sustain its improved activity levels and generate the expected acquisition synergies after full integration.
- Progress toward balancing inland and coastal tank-barge supply with demand, including contract renewals, utilization and pricing trends.
- Fourth-quarter marine utilization and the effect of hurricane disruptions, customer recoveries and infrastructure constraints.
- Actual 2017 capital expenditures versus the $175 million to $185 million projection and the resulting need for additional borrowings.
- Revolving-credit availability, interest expense, covenant compliance and debt-to-capitalization levels following the acquisitions.
- Final purchase-price allocations for Stewart & Stevenson and Sneed Shipbuilding, including goodwill and identifiable intangible assets.
- Insurance recoveries, reserves and potential liabilities related to the Nathan E. Stewart and Miss Susan incidents.
- The effect of pending revenue recognition, lease, pension and cash-flow accounting standards on future reported results.