Kirby Corporation 2017 Form 10-K Summary
Business context and reporting period
Kirby Corporation operates two segments: marine transportation and distribution and services. Marine transportation is the nation’s largest domestic tank-barge operation, moving petrochemicals, black oil, refined petroleum products and agricultural chemicals. Distribution and services provides engine, transmission and equipment parts, repair, rental, manufacturing and remanufacturing services, with significant exposure to oilfield services.
The filing covers the fiscal year ended December 31, 2017. The filing was dated February 26, 2018. The company completed the Stewart & Stevenson acquisition in September 2017 and acquired Higman Marine after year-end on February 14, 2018.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $2.214 billion | $1.771 billion | +25% |
| Marine transportation revenue | $1.324 billion | $1.472 billion | -10% |
| Distribution and services revenue | $890.3 million | $298.8 million | +198% |
| Operating income | $94.2 million | $245.2 million | -62% |
| Net earnings attributable to Kirby | $313.2 million | $141.4 million | +121% |
| Diluted EPS | $5.62 | $2.62 | +115% |
| Cash flow from operations | $353.4 million | $415.8 million | -15% |
| Capital expenditures | $177.2 million | $231.1 million | -23% |
| Total assets | $5.127 billion | $4.290 billion | +20% |
| Long-term debt, including current portion | $992.4 million | $722.8 million | +37% |
| Total equity | $3.114 billion | $2.413 billion | +29% |
Reported consolidated operating margin was approximately 4.3%, compared with 13.8% in 2016, while reported net margin was approximately 14.1%. Comparability is significantly affected by a $269.5 million after-tax deferred tax benefit from U.S. tax reform and a $67.0 million after-tax non-cash impairment charge.
- Marine transportation operating income declined 47% to $136.0 million, and operating margin fell to 10.3% from 17.5%.
- Distribution and services operating income increased to $86.6 million from $3.2 million, and operating margin improved to 9.7% from 1.1%, primarily due to oilfield equipment demand and the Stewart & Stevenson acquisition.
- Cash and cash equivalents were $20.1 million at December 31, 2017. The revolving credit facility had $495.8 million outstanding against an $850 million commitment, leaving $345.3 million available at year-end. The company reported $434.5 million of revolver availability and $8.9 million of credit-line availability as of February 23, 2018.
- Debt-to-capitalization increased to 24.2% from 23.1%. Debt consisted primarily of $495.8 million under the revolving facility and $500 million of senior notes due in 2020 and 2023.
- Contractual obligations totaled $1.324 billion, including $995.8 million of long-term debt, operating leases and vessel construction commitments.
Material changes versus the prior comparable period
- Total revenue increased because distribution and services more than offset the marine transportation decline. The shift changed segment mix from 83% marine transportation and 17% distribution and services in 2016 to 60% and 40%, respectively, in 2017.
- Marine transportation was pressured by industry-wide inland and coastal tank-barge overcapacity, lower contract pricing, weaker coastal utilization and more vessels operating in the spot market. Inland term-contract renewals declined approximately 4% to 8% on average.
- Coastal utilization fell to the low-60% to mid-60% range in the third and fourth quarters. The company released chartered tugboats, idled vessels and reduced headcount in response.
- Distribution and services benefited from stronger demand for pressure-pumping-unit remanufacturing, transmission overhauls, oilfield equipment manufacturing, engines and parts. Stewart & Stevenson contributed $232 million of 2017 revenue and approximately $901 million of assets, but its internal controls were excluded from management’s year-end internal-control assessment.
- The company issued 5.7 million shares valued at $366.6 million and used borrowings to fund the cash portion of the $758.2 million Stewart & Stevenson transaction.
- The company recorded a $105.7 million pre-tax impairment charge for older out-of-service coastal tank barges, inactive coastal tugboats and inland towboats intended for sale, scrapping or retirement.
- Operating cash flow declined by $62.4 million, mainly because of lower marine revenue and operating income and higher working-capital investment associated with increased distribution and services activity.
Guidance, outlook, risks and unusual items
- Management projected 2018 capital expenditures of $195 million to $215 million, funded through operating cash flow and available credit.
- For inland marine transportation, management expected 2018 utilization in the low-to-mid-90% range and modest pricing improvement in the second half, supported by retirements, limited new construction and higher petrochemical demand.
- For coastal marine transportation, management expected utilization in the low-to-mid-80% range and a 10% to 15% decline in coastal term-contract rates during 2018. Management did not expect coastal supply and demand to rebalance during 2018 without improved demand.
- Management expected continued growth in distribution and services during 2018 from pressure-pumping-unit remanufacturing, equipment manufacturing, parts and service demand, and the full-year contribution from Stewart & Stevenson. It also expected marine customers’ deferred maintenance to support higher demand for overhauls, engines and parts.
- On February 12, 2018, Kirby issued $500 million of 4.2% senior unsecured notes due March 1, 2028. Proceeds funded the $419.7 million Higman acquisition completed February 14, 2018, with remaining proceeds available for general corporate purposes.
- Higman added 159 inland tank barges and 75 inland towboats, including barges under construction, materially expanding the inland fleet after year-end.
- Key risks include tank-barge overcapacity, fuel-price volatility and delayed fuel recovery, lower crude-oil and natural-gas-condensate volumes, oilfield-service cyclicality, weather and waterway disruptions, aging locks and dams, crew availability, marine accidents and pollution, environmental and ballast-water regulation, Jones Act changes or waivers, cybersecurity, acquisition integration and interest-rate exposure.
- Contingencies include CERCLA matters involving the Portland Harbor, U.S. Oil Recovery and SBA Shipyard sites, as well as claims related to prior marine spill and collision incidents. Management believes reserves and insurance are adequate and does not expect these matters to have a material adverse effect, but ultimate exposure remains subject to investigation and allocation.
- The company expects to adopt the new revenue standard in 2018 with an approximately $10 million reduction to retained earnings, primarily because certain pressure-pumping-unit manufacturing revenue will be recognized upon shipment rather than under percentage-of-completion accounting.
Most important facts for an investor to verify
- Separate the $269.5 million tax-reform benefit and $105.7 million impairment from recurring earnings when assessing 2017 profitability.
- Track whether inland and coastal tank-barge utilization and pricing improve as older capacity retires and new capacity enters service.
- Assess the sustainability of distribution and services earnings after the initial recovery in oilfield activity and the partial-year Stewart & Stevenson contribution.
- Reconcile post-year-end leverage and liquidity after the $500 million notes issuance and Higman acquisition.
- Review acquisition integration, goodwill and intangible balances, including $935.1 million of goodwill and $232.8 million of other intangibles at year-end.
- Evaluate contractual commitments, environmental contingencies, pension underfunding and potential capital expenditures for ballast-water and other regulatory requirements.
- Confirm that reported cash flow remains sufficient to fund capital expenditures, debt maturities, acquisitions and required pension or contingency payments.