Kirby Corporation — Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company operates two reportable segments: Marine Transportation, the largest U.S. domestic tank-barge operator, and Distribution and Services, which provides engine, transmission, equipment, rental, and oilfield-related services.
Results were materially affected by the COVID-19 pandemic, lower oil prices, reduced oilfield activity, lower barge utilization, adverse weather and waterway closures, and a significant first-quarter impairment charge. As of September 30, 2020, Kirby operated 1,084 inland tank barges and 47 coastal tank barges.
Financial Results and Key Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $496.6 million | $666.8 million | $1.682 billion | $2.182 billion |
| Marine Transportation revenue | $320.6 million | $412.7 million | $1.105 billion | $1.185 billion |
| Distribution and Services revenue | $176.0 million | $254.1 million | $576.8 million | $997.4 million |
| Operating income (loss) | $29.9 million | $77.9 million | $(445.5) million | $225.9 million |
| Net earnings (loss) attributable to Kirby | $27.5 million | $48.0 million | $(294.8) million | $139.6 million |
| Diluted earnings (loss) per share | $0.46 | $0.80 | $(4.92) | $2.32 |
| Cash flow from operations | Not separately provided | Not separately provided | $359.8 million | $387.6 million |
Q3 revenue declined 26% year over year, while net earnings attributable to Kirby declined 43%. Nine-month revenue declined 23%, and the company reported a substantial net loss primarily because of first-quarter noncash impairment and inventory charges.
- Marine Transportation: Q3 operating income was $32.4 million versus $72.7 million, and the operating margin was 10.1% versus 17.6%. Nine-month operating income was $134.5 million versus $161.4 million, with a 12.2% margin versus 13.6%.
- Distribution and Services: Q3 operating income was $1.1 million versus $9.1 million, and the operating margin was 0.6% versus 3.6%. Nine-month operating loss was $9.3 million versus operating income of $69.9 million, with a negative 1.6% margin versus 7.0%.
- Impairments and unusual items: The first nine months included $561.3 million of pretax noncash charges, comprising $388.0 million of goodwill impairment, $165.3 million of long-lived-asset impairments, and an $8.0 million inventory write-down. The after-tax impact was $433.3 million, or $7.24 per share.
- Taxes: The CARES Act enabled net operating loss carrybacks, producing a $182.7 million tax benefit for the first nine months and a $159.6 million federal income-tax receivable at September 30, 2020.
Cash Flow, Debt, Liquidity, and Capital Allocation
- Operating cash flow was $359.8 million for the first nine months, down 7% from 2019.
- Capital expenditures were $129.4 million, and acquisitions of businesses and marine equipment used $348.8 million.
- Financing activities provided $206.7 million, including $360.1 million of net borrowings under bank credit facilities and $150.0 million of repayments on long-term debt.
- Cash and cash equivalents were $119.6 million at September 30, 2020, compared with $24.7 million at December 31, 2019.
- Debt carrying value, including current debt and net of discounts and issuance costs, was $1.578 billion, versus $1.370 billion at year-end 2019. Debt to capitalization increased to 33.9% from 28.9%.
- The $850 million revolving credit facility had $484.6 million of availability at September 30, 2020. The company was in compliance with all debt covenants.
- Management projected approximately $150 million of 2020 capital expenditures, funded through operating cash flow and revolver borrowings.
Material Changes Versus the Prior Comparable Period
- Marine Transportation revenue declined 22% in Q3 and 7% for the first nine months, primarily from lower utilization, lower inland spot pricing, lower fuel rebills, coastal vessel retirements, and shipyard activity. The Savage fleet acquisition partially offset the decline.
- Inland tank-barge utilization fell to the low-70% range in Q3 2020 from the low-90% range in Q3 2019. Coastal utilization was in the mid-70% range versus the mid-80% range.
- Distribution and Services revenue declined 31% in Q3 and 42% for the first nine months. Oilfield demand was impaired by low oil prices, reduced customer spending, excess pressure-pumping capacity, and COVID-19 effects. Commercial and industrial activity also weakened.
- Debt increased primarily because borrowings financed the Savage and Convoy acquisitions. The company repaid $150 million of 2.72% senior notes at maturity in February 2020.
- The company acquired Savage’s inland tank-barge fleet on April 1, 2020 for $279.0 million and acquired Convoy’s assets on January 3, 2020 for $37.2 million. It also purchased five newly constructed inland pressure barges for $33.2 million.
- Goodwill declined 31% and other intangible assets declined 66% from year-end 2019, primarily because of impairment charges.
- The previously identified material weakness in internal control over financial reporting was remediated during the third quarter.
Guidance, Outlook, Risks, and Contingencies
- Management expected inland revenue and operating income to be flat to slightly down in Q4 2020 versus Q3, with some sequential benefit from reopening the Illinois River but potential winter-weather disruption.
- Coastal revenue was expected to be flat sequentially, with operating margins in the negative low-single-digit range.
- Distribution and Services revenue was expected to modestly decline in Q4, with operating margins in the negative low- to mid-single-digit range. Oilfield activity, customer budget exhaustion, seasonal factors, and excess pressure-pumping capacity were identified as ongoing pressures.
- COVID-19 remained the principal uncertainty and could further reduce demand, disrupt operations, and adversely affect financial condition and results.
- Marine transportation remains exposed to utilization, contract pricing, fuel-cost recovery timing, weather, waterway closures, industry capacity, and petrochemical and refining activity.
- The company was involved in pollution and maritime claims relating to the M/V Voyager incident, the Nathan E. Stewart grounding, and the M/V Miss Susan collision. Management stated that accruals and insurance coverage were adequate and did not expect a material adverse effect, although exposure in the Nathan E. Stewart civil proceeding could not be estimated.
- Guarantees, letters of credit, and performance bonds had aggregate notional value of $23.0 million at September 30, 2020; management did not expect material cash outlays.
Important Facts for Investors to Verify
- Whether lower marine utilization and pricing stabilized or deteriorated after September 30, 2020.
- The recoverability of remaining goodwill and intangible assets in Distribution and Services after the 2020 impairment charges.
- Progress toward oilfield-market recovery and the effect of excess pressure-pumping capacity on future revenue and margins.
- Actual fourth-quarter and full-year 2020 capital expenditures versus the projected $150 million.
- Revolver utilization, debt covenant compliance, interest-rate exposure, and the scheduled 2024 debt maturities.
- Timing and collectability of the $159.6 million federal income-tax receivable.
- Developments, insurance coverage, and ultimate exposure related to the disclosed maritime and environmental contingencies.
- The sustainability of operating cash flow given lower revenue, reduced utilization, acquisition-related debt, and continuing COVID-19 uncertainty.