Business Context and Reporting Period
Kirby Corporation, the largest U.S. domestic tank barge operator, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. Operations comprise Marine Transportation and Distribution and Services. Marine Transportation moves bulk liquid products by inland and coastal vessels; Distribution and Services provides aftermarket parts and services, equipment rentals, and oilfield equipment manufacturing.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $666.8 million | $704.8 million | $2.182 billion | $2.249 billion |
| Operating income | $77.9 million | $68.0 million | $225.9 million | $174.5 million |
| Net earnings attributable to Kirby | $48.0 million | $41.8 million | $139.6 million | $102.9 million |
| Diluted EPS | $0.80 | $0.70 | $2.32 | $1.72 |
| Operating cash flow | Not separately provided | Not separately provided | $387.6 million | $272.3 million |
- Marine Transportation revenue increased 8% in both the quarter and nine-month period. Segment operating income increased 50% and 57%, respectively, with margins of 17.6% and 13.6%, compared with 12.7% and 9.4% in the prior-year periods.
- Distribution and Services revenue declined 21% in the quarter and 13% year to date. Segment operating income decreased 62% and 31%, respectively, and margins fell to 3.6% and 7.0% from 7.4% and 8.8%.
- Consolidated operating margin was approximately 11.7% in Q3 2019 versus 9.6% in Q3 2018, and approximately 10.4% for the first nine months versus 7.8%.
- Cash and cash equivalents were $9.4 million at September 30, 2019, compared with $7.8 million at December 31, 2018. Total assets were $6.128 billion and total equity was $3.374 billion.
- Net cash used in investing activities was $407.1 million, including $184.1 million of capital expenditures and $257.5 million for acquisitions and marine equipment. Net cash provided by financing activities was $21.1 million.
- Total debt carrying value was approximately $1.434 billion. Debt to capitalization was 29.8%, down from 30.5% at December 31, 2018.
- At September 30, 2019, Kirby had no borrowings under its $850 million revolving facility, $440 million outstanding under the term loan, $500 million of 2028 notes, and $500 million of Senior Notes Series A and B. The company reported $844.7 million of revolving-facility availability as of September 30 and $833.3 million as of November 6, 2019.
Material Changes Versus Prior Comparable Period
- Net earnings attributable to Kirby increased 15% in Q3 and 36% in the first nine months, despite lower consolidated revenue. The prior-year nine-month period included a $18.1 million nondeductible executive retirement charge, $3.3 million of Higman transaction costs, and $2.9 million of severance and retirement costs.
- Marine Transportation benefited from the Higman, Targa, CGBM, and March 2019 Cenac acquisitions, stronger pricing, and improved coastal utilization. The Cenac acquisition added 63 inland tank barges, 34 inland towboats, and two offshore tugboats for $244.5 million.
- Distribution and Services weakened because of lower oilfield activity, reduced pressure-pumping equipment demand, and lower transmission parts and service activity. Commercial and industrial demand, including backup power generation, partially offset the decline.
- Interest expense rose 16% in Q3 and 24% year to date because of higher debt associated with prior acquisitions and the Cenac transaction.
- The company adopted the new lease standard on January 1, 2019, recognizing $168.1 million of operating lease right-of-use assets and $175.8 million of lease liabilities at adoption, with no material earnings or cash-flow impact.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2019 capital expenditures of $225 million to $245 million, funded primarily by operating cash flow and available financing.
- Inland Marine Transportation revenue was expected to be stable in Q4 versus Q3, while operating income was expected to decline because of winter weather, lock closures, reduced operating efficiency, and higher regulatory maintenance expense. Inland utilization was expected in the low-90% range.
- Coastal revenue and operating income were expected to improve versus 2018, although seasonal Alaska weakness and scheduled shipyard maintenance were expected to reduce fourth-quarter results.
- Oilfield-related Distribution and Services revenue and operating income were expected to decline through Q4 as pressure-pumping orders and maintenance activity remained low. Commercial and industrial activity was expected to exceed 2018, but Q4 results were expected to decline sequentially due to seasonal rental-fleet effects.
- On October 31, 2019, Kirby agreed to acquire substantially all assets of Convoy Servicing Company and Agility Fleet Services for approximately $40 million, subject to customary closing conditions and expected to close in the first quarter of 2020.
- Material risks include economic conditions, oilfield activity and commodity-price volatility, fuel costs, interest rates, weather and waterway disruptions, marine accidents, environmental regulation, competition, acquisition integration, and covenant compliance.
- Kirby reported legal and environmental proceedings related to the M/V Voyager incident and the Nathan E. Stewart grounding. Management believes insurance and reserves are adequate and does not expect a material adverse effect, but exposure related to the Nathan E. Stewart proceedings could not be estimated.
- The company disclosed a material weakness in internal control over financial reporting related to inappropriate privileged access rights. Disclosure controls were therefore not effective as of September 30, 2019; remediation was expected to be completed during 2019, subject to successful operation and testing of controls.
Investor Verification Points
- Verify the sustainability of Marine Transportation pricing, utilization, acquisition synergies, and the effect of weather, waterway closures, and vessel maintenance.
- Track oilfield-market deterioration and its effect on Distribution and Services revenue, margins, inventory, and receivables.
- Review debt maturities, particularly the $150 million Senior Notes Series A due February 2020, variable-rate exposure, and compliance with financial covenants.
- Confirm the final 2019 capital-expenditure level and funding requirements relative to operating cash flow and revolving-credit availability.
- Monitor the Voyager and Nathan E. Stewart claims, insurance coverage, reserves, and any change in estimated exposure.
- Assess completion and effectiveness testing of the material-weakness remediation plan.