Kirby Corporation 2017 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation filed an unaudited Form 10-Q for the three months ended March 31, 2017. The company operates two reportable segments: marine transportation of bulk liquid and dry-bulk products, and diesel engine services serving marine, power-generation and land-based oilfield markets.
- Marine fleet at March 31, 2017: 864 inland tank barges with 17.6 million barrels of capacity, 68 coastal tank barges with 6.1 million barrels of capacity, and related towboats and tugboats.
- Revenue mix: marine transportation 70%; diesel engine services 30%.
Financial Performance and Key Metrics
| ($ in thousands, except per-share data) | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $491,705 | $458,733 | 7% |
| Marine transportation revenue | $343,652 | $378,343 | (9%) |
| Diesel engine services revenue | $148,053 | $80,390 | 84% |
| Operating income | $45,571 | $65,401 | (30%) |
| Operating margin | 9.3% | 14.3% | Down 5.0 points |
| Net earnings attributable to Kirby | $27,483 | $38,099 | (28%) |
| Diluted EPS | $0.51 | $0.71 | (28%) |
| Net cash from operating activities | $85,202 | $113,231 | (25%) |
| Capital expenditures | $45,765 cash flow basis | $50,523 | (9%) |
Marine transportation operating income fell 49% to $35,254 thousand, with the segment margin declining to 10.3% from 18.4%. Diesel engine services operating income improved to $13,734 thousand from a $806 thousand loss, and its margin improved to 9.3% from negative 1.0%.
- Interest expense was $4,457 thousand, up from $4,193 thousand. The average debt balance was approximately $706.1 million at an average interest rate of 2.9%.
- Cash and cash equivalents were $2,756 thousand at March 31, 2017, compared with $5,634 thousand at December 31, 2016.
- Total debt, net of debt issuance costs, was approximately $674.6 million, compared with $722.8 million at year-end 2016. Debt-to-capitalization declined to 21.7% from 23.1%.
- The company had $177.535 million outstanding under its revolving credit facility and $500 million of senior notes. The revolving facility matures April 30, 2020; senior notes mature in 2020 and 2023.
- As of May 5, 2017, available borrowing capacity was approximately $390.0 million under the revolving facility and $8.8 million under the separate credit line.
- Current assets were $609.6 million and current liabilities were $333.5 million, implying reported current coverage of approximately 1.8 times.
Material Changes Versus the Prior Comparable Period
- Total revenue increased because diesel engine services growth more than offset the marine transportation decline.
- Marine transportation revenue and operating income were pressured by lower inland term and spot pricing, lower coastal spot pricing, reduced coastal utilization, oversupply of coastal tank barges, increased idle time and higher voyage costs.
- Inland term contracts renewed during the quarter at rates 4% to 6% below comparable 2016 renewals. Coastal contracts were generally flat on renewal, but many customers shifted to the spot market.
- Marine utilization was high-80% to low-90% inland versus 90% to 95% in the prior-year quarter, and mid-70% to low-80% coastal versus high-80% to low-90%.
- Diesel engine services benefited from stronger pressure-pumping-unit remanufacturing, transmission overhauls, oilfield equipment manufacturing and land-based engine, transmission and parts demand.
- The 2016 quarter included $5.605 million of pretax severance charges, including $3.792 million in marine transportation, $1.436 million in diesel engine services and $377 thousand in corporate expenses. The absence of these charges aided the 2017 comparison.
- Operating cash flow declined primarily because of lower earnings, less favorable working-capital changes and a lower deferred-tax provision.
- The company adopted ASU 2016-09 effective January 1, 2017, recording an $8.486 million cumulative reduction to retained earnings. The new accounting also reduced the first-quarter tax provision by $2.090 million.
Guidance, Outlook, Risks and Unusual Items
- Management projects 2017 capital expenditures of $165 million to $185 million, funded by operating cash flow and available credit.
- Management expects inland marine utilization of approximately the mid-80% to low-90% range for 2017. Pricing may remain pressured for the balance of the year, with potential modest improvement in the second half if supply and demand move toward balance.
- Coastal utilization is expected to range from the mid-70% to mid-80% range. Management does not expect coastal capacity and demand to balance during 2017 without improved demand.
- Management expects strong demand for pressure-pumping-unit remanufacturing and some new oilfield equipment orders for the remainder of 2017. Marine diesel markets are expected to remain weak, particularly in the Gulf of Mexico, while power generation is expected to remain stable.
- The company retired 17 inland tank barges and added one new barge during the quarter, resulting in a net reduction of 12 inland barges and approximately 230,000 barrels of capacity.
- The company expects delivery of a 155,000-barrel coastal articulated tug-barge unit in the third quarter of 2017 and remains exposed to additional industry capacity entering the coastal market.
- Material risks include excess tank-barge capacity, pricing and utilization pressure, crude and condensate volumes displaced by pipelines, fuel-price volatility, weather and navigational delays, marine accidents, environmental regulation, interest-rate changes, competition and cyclicality in oilfield services.
- The 2016 Houston Ship Channel pollution claims were settled with the principal claimants; the related three-year Oil Pollution Act claim period expired March 22, 2017. A separate crew-member action remains pending. Management believes reserves and insurance coverage are adequate and does not expect a material adverse effect.
- Guaranties, letters of credit and performance bonds totaled $13.593 million at March 31, 2017. Management does not expect material cash outlays under these instruments.
- On April 12, 2017, the company amended its pension plan to cease benefit accruals for certain participants after May 31, 2017. No one-time charge is expected, but the plan obligation is expected to decline. The company did not expect to make a pension contribution during 2017 based on then-current conditions.
Important Facts for Investors to Verify
- Whether inland and coastal tank-barge utilization and contract pricing improve as expected, particularly in the second half of 2017.
- Whether excess coastal capacity and new competitor deliveries further pressure rates, idle time and margins.
- The sustainability of the rebound in pressure-pumping-unit remanufacturing and the effect of oilfield activity on diesel engine services.
- Execution of the $165 million to $185 million 2017 capital-spending program and its effect on debt and free cash flow.
- Compliance with revolving-credit and senior-note covenants as operating conditions evolve.
- Potential costs, insurance recoveries and ultimate resolution of the remaining maritime pollution and crew-member litigation.
- The financial statement effects of pending accounting standards, including revenue recognition, leases, pension-cost presentation, goodwill impairment and cash-flow classification.