Kirby Corporation 10-Q Summary
Business context and reporting period
Kirby Corporation is the largest domestic tank-barge operator in the United States, with marine transportation and distribution and services segments. The filing covers the unaudited quarter and six months ended June 30, 2020. Results were materially affected by the COVID-19 pandemic, lower oil prices, reduced industrial activity, and acquisitions completed during the period.
- As of June 30, 2020, Kirby operated 1,131 inland tank barges with 25.6 million barrels of capacity and 47 coastal tank barges with 4.5 million barrels of capacity.
- The Savage inland tank-barge fleet acquisition closed April 1, 2020 for $279.0 million and added 92 tank barges, approximately 2.5 million barrels of capacity, and 45 towboats.
- The Convoy acquisition closed January 3, 2020 for $37.2 million and expanded Thermo King refrigeration distribution and service operations.
Financial performance and key metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $541.2 million | $771.0 million | $1.185 billion | $1.516 billion |
| Operating income (loss) | $34.3 million | $75.8 million | $(475.4) million | $147.9 million |
| Net earnings (loss) attributable to Kirby | $25.0 million | $47.3 million | $(322.2) million | $91.6 million |
| Diluted EPS | $0.42 | $0.79 | $(5.38) | $1.53 |
| Operating margin | 6.3% | 9.8% | (40.1)% | 9.8% |
The six-month loss included $561.3 million of pretax noncash impairment and inventory charges, including $388.0 million of goodwill impairment, $165.3 million of long-lived asset impairment, and an $8.0 million inventory write-down. The second quarter also included $3.3 million of bad-debt expense related to a large oil and gas customer bankruptcy and $1.4 million of severance expense.
- Marine transportation: Second-quarter revenue declined 6% to $381.0 million and operating income declined 4% to $51.4 million. Six-month revenue increased 2% to $784.2 million and operating income increased 15% to $102.1 million, primarily due to the Savage and Cenac acquisitions. Operating margins were 13.5% in the second quarter and 13.0% for the six months.
- Distribution and services: Second-quarter revenue declined 56% to $160.2 million and the segment reported a $14.1 million operating loss versus $23.1 million of income in the prior-year quarter. Six-month revenue declined 46% to $400.8 million and the segment reported a $10.4 million operating loss versus $60.7 million of income. Margins were negative 8.8% in the second quarter and negative 2.6% for the six months.
Cash flow, debt, liquidity and balance sheet
- Net cash provided by operating activities was $242.1 million for the first six months, up from $188.2 million in the prior-year period.
- Investing cash outflows were $430.2 million, including $342.2 million for acquisitions and $92.8 million for capital expenditures.
- Financing activities provided $271.7 million, primarily from $425.0 million of net borrowings under bank credit facilities, partially offset by repayment of $150.0 million of senior notes.
- Cash and cash equivalents were $108.5 million at June 30, 2020, compared with $24.7 million at December 31, 2019.
- Total debt, net of discounts and issuance costs, was $1.643 billion at June 30, 2020, compared with $1.370 billion at year-end 2019. The debt-to-capitalization ratio increased to 35.0% from 28.9%.
- The $850.0 million revolving credit facility had $425.0 million outstanding and $419.6 million of availability at June 30, 2020. The term loan had $375.0 million outstanding, and interest rates on both facilities were 1.6%.
- As of August 5, 2020, the Company reported $104.8 million of cash, $454.6 million of revolving-credit availability, and $8.8 million available under a separate credit line.
- Current assets were $1.078 billion versus $917.6 million at year-end, including a $125.9 million federal income-tax receivable arising from CARES Act net operating loss carrybacks.
Material changes versus the prior comparable period
- Consolidated second-quarter revenue fell 30% and six-month revenue fell 22%, driven primarily by COVID-19-related reductions in marine utilization and severe weakness in oilfield and industrial markets.
- Marine transportation remained profitable and benefited from acquisitions, but second-quarter inland utilization declined to the mid-80% range from the mid-90% range in the prior-year quarter; coastal utilization declined to the mid-70% range from the mid-80% range.
- Distribution and services deteriorated sharply because of lower oilfield activity, excess pressure-pumping capacity, reduced customer spending, and lower on-highway and power-generation demand.
- Goodwill declined 31% and other intangible assets declined 65% from December 31, 2019, primarily because of impairment charges in distribution and services.
- Interest expense declined 11% for the six months because of lower interest rates, despite higher average debt.
- The CARES Act generated a $174.2 million tax benefit for the six months, including a $50.8 million benefit from carrying losses back to years taxed at the 35% federal rate. The Company received a $30.6 million tax refund during the period.
Guidance, outlook, risks and unusual items
- Management projected approximately $150 million of 2020 capital expenditures, funded through operating cash flow and borrowings.
- Management expected inland revenues and operating income to decline in the third quarter versus the second quarter, with utilization starting in the mid-70% range and a slow recovery as economic activity rebounds.
- Coastal revenue and operating income were expected to improve modestly in the third quarter, although coal transportation volumes were expected to decline for the remainder of 2020.
- Oil and gas activity was expected to remain challenged through 2020, with minimal service and parts demand and few pressure-pumping equipment orders. Distribution and services margins were expected to improve in the third quarter but remain below breakeven.
- Key risks include the duration and severity of COVID-19, economic weakness, oil and gas capital-spending reductions, excess industry capacity, utilization and contract-rate volatility, fuel costs, interest rates, weather and waterway disruptions, regulatory changes, and acquisition integration.
- Kirby disclosed environmental and maritime claims related to the M/V Voyager incident, the Nathan E. Stewart grounding, and the M/V Miss Susan collision. Management believes reserves and insurance coverage are adequate, but exposure in the Nathan E. Stewart civil proceeding could not be estimated.
- Guarantees, letters of credit and performance bonds totaled $23.2 million at June 30, 2020; management did not expect material cash outlays.
- Disclosure controls were not effective because of a previously reported material weakness in internal control over financial reporting. Management expected remediation and effectiveness testing by September 30, 2020.
Most important facts for investors to verify
- Whether marine transportation utilization and contract rates recover from COVID-19-related lows and whether the Savage acquisition produces expected benefits.
- Whether the distribution and services segment returns to profitability amid weak oilfield demand and excess pressure-pumping capacity.
- The sustainability of operating cash flow and the pace of debt reduction after acquisition-related borrowings.
- Potential further impairment charges or inventory write-downs if market conditions remain weak.
- The status and effectiveness of the remediation plan for the disclosed material weakness.
- Developments in the disclosed maritime, environmental and other legal contingencies, including insurance recoveries and reserve adequacy.