Kirby Corporation 2020 First-Quarter 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, transmission and equipment services, rentals, and oilfield equipment manufacturing. The filing covers the three months ended March 31, 2020, compared primarily with the three months ended March 31, 2019. The financial statements are unaudited.
Operations are reported in two segments: Marine Transportation and Distribution and Services. COVID-19, declining oil prices and reduced oilfield activity materially affected the quarter and the outlook.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $643.9 million | $744.6 million | Down 14% |
| Marine Transportation revenue | $403.3 million | $368.1 million | Up 10% |
| Distribution and Services revenue | $240.7 million | $376.5 million | Down 36% |
| Operating income (loss) | $(381.8) million | $72.1 million | Decline |
| Net earnings (loss) attributable to Kirby | $(248.5) million | $44.3 million | Decline |
| Diluted EPS | $(4.15) | $0.74 | Decline |
| Net cash provided by operating activities | $71.5 million | $38.5 million | Up 86% |
The operating loss included $433.3 million of primarily non-cash impairment and inventory charges, or $334.6 million after tax and $5.59 per share. Excluding these charges, the filing does not present a full non-GAAP earnings measure.
Marine Transportation operating income increased 43% to $50.7 million, and its operating margin improved to 12.6% from 9.6%. Distribution and Services operating income declined 90% to $3.7 million, and its margin fell to 1.5% from 10.0%.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $322.6 million at March 31, 2020, compared with $24.7 million at December 31, 2019.
- Total debt, including current debt and before unamortized issuance costs, was approximately $1.710 billion, compared with $1.375 billion at year-end 2019.
- Debt increased primarily because Kirby borrowed $485.0 million under its revolving credit facility. The company repaid $150.0 million of senior notes at maturity in February 2020.
- The $850.0 million revolving credit facility had $359.6 million of availability at March 31, 2020. The $375.0 million term loan and revolving facility mature March 27, 2024; scheduled term-loan principal payments begin in 2023.
- Debt-to-capitalization increased to 35.3% from 28.9%, primarily due to borrowing and the quarterly net loss.
- As of May 7, 2020, the company reported $73.8 million of cash equivalents, $359.6 million available under the revolving facility and $8.8 million available under another credit line. Management stated that the company was in compliance with debt covenants at March 31, 2020.
Material Changes Versus the Prior Comparable Period
- Marine Transportation benefited from the March 2019 Cenac acquisition and higher inland and coastal pricing. Inland and coastal utilization remained relatively strong during the quarter, although weather, high water, lock maintenance and shipyard delays affected operations.
- Distribution and Services deteriorated sharply because of lower oilfield activity, reduced customer spending, oversupply of pressure-pumping equipment and the initial effects of COVID-19. Commercial and industrial revenue benefited from the Convoy acquisition but was partly offset by weaker on-highway and power-generation demand.
- Kirby recorded $260.0 million of goodwill impairment, $165.3 million of long-lived asset impairment and an $8.0 million inventory write-down, primarily related to the Distribution and Services segment.
- Goodwill declined to $704.1 million from $953.8 million, and other intangible assets declined to $73.7 million from $210.7 million, primarily because of the impairment charges.
- Current assets increased 49%, principally because of higher cash and income-tax receivables. Total equity declined 7% to $3.125 billion, primarily because of the quarterly net loss.
- Kirby acquired Convoy for cash consideration of approximately $37.2 million net of a receivable adjustment and purchased three inland pressure barges for $20.1 million during the quarter.
Cash Flow, Capital Spending and Acquisitions
- Operating cash flow was $71.5 million, compared with $38.5 million in Q1 2019.
- Capital expenditures were $49.2 million, and acquisitions of businesses and marine equipment used $60.4 million.
- Financing activities provided $332.0 million, primarily from revolving-credit borrowings net of the $150.0 million senior-note repayment.
- On April 1, 2020, after quarter-end, Kirby acquired Savage Inland Marine’s fleet and related businesses for $277.9 million in cash. The acquired fleet included 92 inland tank barges with approximately 2.6 million barrels of capacity and 46 inland towboats.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2020 capital expenditures to be at or below the low end of its previously disclosed $155 million to $175 million range.
- Inland barge utilization declined to approximately 90% in April as refinery and petrochemical utilization fell. Management expects lower demand for petrochemicals, crude oil and refined products but cited long-term contracts, storage opportunities, product relocations and lock maintenance as partial mitigants.
- Management planned cost reductions, including reductions in the chartered towboat fleet, workforce reductions, furloughs, reduced schedules, pay freezes, facility consolidation and tighter discretionary spending.
- Oil and gas activity was expected to decline materially throughout 2020, with minimal service and parts demand and few, if any, new pressure-pumping equipment orders.
- Coastal revenues and utilization were expected to decline because of COVID-19, lower refinery runs, weaker global demand and shipyard labor constraints. Kirby expected to retire four aging coastal articulated tug-barge units during 2020.
- Material risks include the uncertain duration and severity of COVID-19, lower energy demand and oil prices, customer spending reductions, economic conditions, vessel utilization, fuel-cost recovery timing, interest-rate changes, regulatory and Jones Act changes, weather and waterway disruptions, acquisitions and legal contingencies.
- Kirby reported ongoing pollution and marine casualty proceedings involving the M/V Voyager and the Nathan E. Stewart. Management stated that it had adequate reserves and insurance and did not expect a material adverse effect, although exposure in the Canadian civil proceeding was not estimable.
- Letters of credit and performance bonds totaled $23.2 million at March 31, 2020. Management did not expect material cash outlays under these instruments.
- The CARES Act generated a tax benefit from carrying net operating losses back to prior years. The filing presents inconsistent amounts for this benefit in different sections, including $50.284 million in the tax footnote and approximately $50.824 million in the MD&A; this should be verified.
Investor Verification Items
- Verify the final amount and per-share impact of the CARES Act tax benefit, given the inconsistent figures in the filing.
- Assess the effect of the April 1 Savage acquisition on leverage, liquidity, vessel utilization, integration costs and future earnings.
- Monitor COVID-19 effects on inland and coastal utilization, refinery and petrochemical volumes, oilfield activity and Distribution and Services margins.
- Reconcile reported debt, credit-facility availability and covenant headroom after the Savage acquisition and subsequent borrowing activity.
- Review the assumptions supporting the goodwill and long-lived-asset impairment tests, including forecasts, discount rates and market comparables.
- Track the status, insurance coverage and reserve sufficiency of the disclosed marine casualty and pollution claims.