Kirby Corporation 2018 Q3 Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation is the largest U.S. domestic tank barge operator, transporting petrochemicals, black oil, refined petroleum products and agricultural chemicals. It also provides engine and equipment distribution, aftermarket services, rentals, and oilfield equipment manufacturing. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018, with comparisons to the comparable 2017 periods.
- Marine transportation fleet: 981 inland tank barges with 21.6 million barrels of capacity, 54 coastal tank barges with 5.1 million barrels of capacity, and 282 average inland towboats during the quarter.
- Distribution and services revenue was heavily exposed to oil and gas markets, which represented 62% of segment revenue in the quarter and 68% for the nine-month period.
Financial Performance and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $704.8 million | $541.3 million | $2.249 billion | $1.506 billion |
| Operating income | $68.0 million | $52.9 million | $174.5 million | $146.2 million |
| Net earnings attributable to Kirby | $41.8 million | $28.6 million | $102.9 million | $81.9 million |
| Diluted EPS | $0.70 | $0.52 | $1.72 | $1.50 |
| Operating margin | 9.6% | 9.8% | 7.8% | 9.7% |
| Net cash from operations | Not separately provided | Not separately provided | $272.3 million | $259.5 million |
- Third-quarter revenue increased approximately 30%, operating income increased approximately 28%, and net earnings attributable to Kirby increased approximately 46% year over year.
- Nine-month revenue increased approximately 49%, operating income increased approximately 19%, and net earnings attributable to Kirby increased approximately 26% year over year.
- Marine transportation revenue increased 20% in the quarter and 11% year to date. Segment operating income increased 36% in the quarter but declined 4% year to date; margins were 12.7% and 9.4%, respectively, versus 11.2% and 10.8% in the comparable periods.
- Distribution and services revenue increased 45% in the quarter and 124% year to date. Segment operating income increased 9% and 94%, respectively, while margins declined to 7.4% and 8.8% from 9.9% and 10.1%.
- Interest expense rose to $12.3 million in the quarter and $34.7 million year to date, compared with $5.4 million and $14.3 million in the prior-year periods, primarily due to acquisition and equipment financing.
- Cash flow from operations increased 5% year over year, but working-capital changes reduced cash flow by $66.7 million, principally because of higher inventories supporting oil and gas activity.
Balance Sheet, Debt and Liquidity
- Total assets were $5.854 billion at September 30, 2018, up 14% from December 31, 2017. Property and equipment increased 20% to $3.562 billion, reflecting acquisitions and capital spending.
- Cash and cash equivalents declined to $3.6 million from $20.1 million at year-end.
- Total debt was approximately $1.900 billion, including $406.9 million outstanding under the revolving credit facility, $500 million of 2028 Notes, and $500 million of Series A and Series B senior notes, before unamortized discounts and issuance costs.
- Debt-to-capitalization increased to 30.2% from 24.2% at December 31, 2017. Reported debt fair value was $1.370 billion versus carrying value of $1.400 billion.
- The $850 million revolving credit facility matures June 26, 2022. Approximately $435.6 million was available at September 30, 2018, and $475.5 million was available at November 2, 2018. The company was in compliance with applicable debt covenants.
- Capital expenditures were $231.8 million on the cash flow statement and $237.3 million as reflected on the balance sheet during the first nine months. Management projected full-year 2018 capital expenditures of $275 million to $290 million.
Material Changes Versus the Prior Comparable Period
- Growth included the February 2018 acquisition of Higman Marine for $421.9 million, the May 2018 acquisition of Targa’s inland tank barge business for $69.3 million, and the September 2017 acquisition of Stewart & Stevenson.
- Higman added 161 inland tank barges and 75 inland towboats; Targa added 16 pressure barges. The acquisitions materially expanded the marine fleet and increased property, goodwill, debt and depreciation.
- Marine transportation benefited from higher inland utilization and spot pricing, but coastal pricing remained pressured by excess industry capacity. Nine-month marine results also reflected poor weather and operating conditions early in 2018.
- Distribution and services benefited from strong oilfield equipment demand and the Stewart & Stevenson acquisition, but margins declined because of increased costs, supply-chain delays, and lower demand for certain transmissions and remanufactured equipment.
- The first nine months included $18.1 million of one-time, nondeductible expense related to the retirement of the executive Chairman, $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.
- The company adopted ASC 606 using the modified retrospective method, reducing opening retained earnings by $9.7 million. For the third quarter, reported revenue and net earnings attributable to Kirby were $27.0 million and $3.5 million lower, respectively, than they would have been under the prior revenue-recognition method.
Guidance, Outlook, Risks and Unusual Items
- Management expected fourth-quarter inland tank barge utilization in the low-to-mid-90% range, with continued improvement in term-contract pricing. Coastal utilization was expected to remain approximately 80%, although scheduled shipyard work was expected to reduce fourth-quarter revenue and profit versus the third quarter.
- Distribution and services oil and gas revenue and profit were expected to be flat to modestly higher than the third quarter but below first-half levels. Commercial and industrial activity was expected to be flat to modestly lower due to seasonal rental demand.
- Key risks include excess marine capacity, fuel costs and delayed fuel recoveries, weather and water conditions, lock delays, marine accidents, environmental regulation, interest rates, industry competition, oilfield activity, vendor supply-chain constraints, and acquisition integration.
- The Nathan E. Stewart grounding resulted in an October 2018 civil action by the Heiltsuk First Nation and Canadian government charges. Potential exposure was unquantified, although management believed insurance and recorded reserves were adequate and did not expect a material adverse effect.
- Letters of credit, performance bonds and other guarantees had aggregate notional value of $23.7 million at September 30, 2018. Management did not expect material cash outlays under these instruments.
- The company expected no contribution to its primary pension plan in 2018 but expected an approximately $1.4 million fourth-quarter contribution to the Higman pension plan.
Investor Verification Items
- Verify the sustainability of inland utilization and contract-rate improvement against continued industry capacity retirements and new construction.
- Assess whether acquisition-related revenue growth converts into improved margins after integration, higher fuel costs, depreciation and interest expense.
- Monitor oilfield demand, vendor delays, inventory levels and the timing of revenue recognition under ASC 606.
- Reconcile projected capital expenditures with operating cash flow, revolving-credit availability and debt maturities beginning in 2020.
- Review potential liabilities, insurance coverage and reserves related to the Nathan E. Stewart grounding and other environmental or marine claims.
- Track fourth-quarter shipyard downtime, coastal utilization, and the delivery schedule for new towboats, tugboats and the 155,000-barrel coastal ATB.