Kirby Corporation 2016 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation, the largest domestic tank barge operator in the United States, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. Operations comprise Marine Transportation and Diesel Engine Services.
- Marine Transportation operates inland and coastal tank barges, towboats and tugboats transporting petrochemicals, black oil, refined petroleum products and agricultural chemicals.
- Diesel Engine Services provides engine parts, repairs, overhauls, power-generation services and oilfield-service equipment manufacturing and remanufacturing.
- At September 30, 2016, the company operated 881 inland tank barges with 17.9 million barrels of capacity, 68 coastal tank barges with 6.0 million barrels of capacity, 80 coastal tugboats and an average of 227 inland towboats during the quarter.
Financial Performance and Key Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|
| Total revenue | $434.7 million | $532.6 million | $1.335 billion | $1.663 billion |
| Operating income | $56.2 million | $95.1 million | $188.4 million | $296.3 million |
| Net earnings attributable to Kirby | $32.0 million | $56.8 million | $109.1 million | $176.0 million |
| Diluted EPS | $0.59 | $1.04 | $2.02 | $3.17 |
| Operating cash flow | Not separately provided | Not separately provided | $336.5 million | $377.5 million |
- Q3 revenue declined 18% and nine-month revenue declined 20% year over year.
- Q3 operating income declined 41%; nine-month operating income declined 36%.
- Q3 net earnings attributable to Kirby declined 44%; nine-month net earnings declined 38%.
- Q3 diluted EPS declined 43%; nine-month diluted EPS declined 36%.
- Marine Transportation revenue declined 14% in Q3 and 12% for the nine-month period. Operating margins were 15.4% and 17.7%, respectively, versus 22.4% and 22.7% in the comparable 2015 periods.
- Diesel Engine Services revenue declined 34% in Q3 and 45% for the nine-month period. Operating margins were 6.1% and 0.8%, respectively, versus 4.9% and 4.8%.
- Net cash from operating activities declined 11%, primarily reflecting lower earnings, partly offset by higher deferred-tax provisions and depreciation and amortization.
Balance Sheet, Debt and Liquidity
| Metric | September 30, 2016 | December 31, 2015 |
|---|
| Total assets | $4.224 billion | $4.152 billion |
| Cash and cash equivalents | $5.4 million | $5.9 million |
| Current assets | $578.7 million | $640.8 million |
| Long-term debt, less current portion | $726.0 million | $774.8 million |
| Total equity | $2.387 billion | $2.279 billion |
| Debt-to-capitalization ratio | 23.3% | 25.4% |
- Debt consisted of $229.4 million outstanding under the $550 million revolving credit facility and $500 million of senior notes, partially offset by unamortized debt issuance costs.
- The senior notes comprise $150 million due in 2020 at 2.72% and $350 million due in 2023 at 3.29%; no principal payments are required before maturity.
- As of November 2, 2016, availability was $301.4 million under the revolving facility and $9.0 million under the separate $10 million credit line.
- The company was in compliance with all debt covenants at September 30, 2016.
- Cash flow uses included $169.3 million of capital expenditures, $125.6 million for acquisitions and $57.2 million of net financing cash outflows during the first nine months.
Material Changes Versus the Prior Comparable Period
- Results weakened materially because of excess tank-barge capacity, lower utilization, lower inland contract pricing, more coastal vessels in the spot market and weaker crude-oil-related volumes.
- Inland and coastal tank-barge utilization fell to the low-to-mid 80% range in Q3 2016, compared with approximately 90% to 95% in Q3 2015.
- Inland term-contract renewals declined by approximately 5% to 9% on average versus comparable 2015 renewals.
- Diesel Engine Services was adversely affected by reduced oilfield activity, lower crude oil prices, weak Gulf of Mexico activity and customer deferrals of major maintenance projects.
- The company reduced staffing across its businesses and corporate functions. The 2016 first nine months included $5.6 million of pretax severance charges, or approximately $0.06 per share.
- Share count declined year over year primarily because of prior stock repurchases, partially offset by equity compensation activity.
- Debt decreased while property and equipment increased, reflecting acquisitions and fleet investment.
Acquisitions, Outlook, Risks and Unusual Items
- In April 2016, Kirby acquired 27 inland tank barges, 13 towboats and equipment under construction from Seacor for a total value of $91.7 million.
- Kirby acquired four coastal tugboats for $26.5 million in June 2016 and an 80,000-barrel coastal tank barge for $13.7 million later that month.
- On October 11, 2016, after the reporting date, Kirby acquired selected Valley Power Systems assets for $11.4 million, including an EMD engine distribution agreement covering nine western states.
- Management projected 2016 capital expenditures of $230 million to $250 million, funded primarily by operating cash flow and available credit.
- Management expected continued inland pricing pressure and low-to-mid 80% utilization in the fourth quarter. Coastal utilization was also expected to remain in the low-to-mid 80% range.
- The land-based diesel engine services market was expected to remain challenging through the fourth quarter, with a more meaningful recovery not expected until 2017. Marine diesel engine services were expected to remain weak, while power generation was relatively strong but subject to normal seasonal declines.
- Risks identified include excess industry capacity, crude-oil and petrochemical market conditions, customer demand, fuel prices, interest rates, weather and water conditions, marine accidents, environmental regulation, competition, construction costs and acquisition timing.
- On October 13, 2016, the tug Nathan E. Stewart and barge DBL 55 grounded in British Columbia and discharged diesel fuel. Investigations and cleanup activities were ongoing; management believed insurance coverage was adequate.
- For the 2014 Houston Ship Channel collision, the company entered into a proposed $4.9 million Clean Water Act civil-penalty consent decree and reached a settlement with other claimants. Management stated that insurance coverage and reserves were adequate and did not expect a material adverse effect.
- The company expected to contribute up to $25 million to its pension plan before December 31, 2016; no 2016 contribution had been made as of September 30.
Most Important Facts for Investors to Verify
- Whether tank-barge utilization and inland contract pricing stabilize or continue to decline amid excess industry capacity.
- Whether crude-oil, refined-product and petrochemical volumes improve sufficiently to support higher marine utilization and margins.
- Whether Diesel Engine Services recovers as oilfield activity and customer maintenance spending improve.
- Actual 2016 capital expenditures versus the $230 million to $250 million projection and the resulting effect on debt.
- Liquidity, covenant compliance and available borrowing capacity after fourth-quarter capital spending, acquisitions and potential pension funding.
- Insurance recoveries, reserves and ultimate costs related to the Nathan E. Stewart grounding and the prior Houston Ship Channel collision.
- Progress and delivery timing for new coastal ATBs, tugboats and tank barges, as well as the financial contribution from the Seacor and Valley Power Systems acquisitions.
