Kirby Corporation 2018 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation is the largest domestic tank-barge operator in the United States and operates two reportable segments: Marine Transportation and Distribution and Services. The filing covers the unaudited three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
As of June 30, 2018, Kirby operated 990 inland tank barges with 21.7 million barrels of capacity, 55 coastal tank barges with 5.2 million barrels of capacity, and an average of 286 inland towboats. Distribution and Services provides equipment parts, repair, rental, manufacturing and remanufacturing services, with significant exposure to oilfield and oil and gas markets.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $802.7 million | $473.3 million | $1.544 billion | $965.0 million |
| Operating income | $55.9 million | $47.3 million | $106.6 million | $93.3 million |
| Operating margin | 7.0% | 10.0% | 6.9% | 9.7% |
| Net earnings attributable to Kirby | $28.6 million | $25.8 million | $61.1 million | $53.3 million |
| Diluted EPS | $0.48 | $0.48 | $1.02 | $0.99 |
| Operating cash flow | Not separately provided | Not separately provided | $153.8 million | $193.8 million |
Marine Transportation revenue increased 14% in the quarter and 6% for the first six months. Segment operating income increased 7% in the quarter but declined 24% year to date; operating margin was 10.1% in the quarter and 7.6% year to date, compared with 10.7% and 10.6%, respectively, in 2017.
Distribution and Services revenue increased 199% in the quarter and 185% year to date, primarily due to the Stewart & Stevenson acquisition and stronger oilfield equipment and service demand. Segment operating income increased 146% in the quarter and 157% year to date, while operating margin declined to 9.5% from 11.5% in the quarter and to 9.3% from 10.4% year to date.
Operating cash flow declined 21% year to date, primarily because receivables and inventories increased to support higher activity. Capital expenditures were $152.9 million in cash-flow reporting and $169.4 million on the balance sheet, while acquisitions and marine equipment purchases used $499.2 million in cash. Cash and cash equivalents declined to $4.2 million from $20.1 million at December 31, 2017.
Balance Sheet, Debt and Liquidity
- Total assets increased 14% to $5.829 billion from $5.127 billion at year-end 2017.
- Total debt was approximately $1.443 billion at June 30, 2018, compared with $992.4 million at December 31, 2017. The debt-to-capitalization ratio increased to 31.2% from 24.2%.
- Debt included $500 million of 4.2% senior unsecured notes due March 1, 2028, $444.1 million outstanding under the revolving credit facility, $500 million of existing senior notes, and $6.2 million under a credit line.
- The revolving credit facility had $398.1 million available at June 30, 2018; management reported compliance with applicable debt covenants. As of August 2, 2018, availability was $427.2 million under the revolving facility and $8.9 million under the credit line.
- Current assets were $1.035 billion versus current liabilities of $556.3 million. Liquidity remained dependent on operating cash flow and available revolving credit capacity.
Material Changes Versus the Prior Comparable Period
- Higman Marine was acquired on February 14, 2018 for $421.9 million in cash, adding 163 inland tank barges and 75 towboats.
- Kirby acquired Targa’s inland tank-barge business on May 10, 2018 for $69.3 million, adding 16 pressure barges with 258,000 barrels of capacity.
- Distribution and Services results reflected the full-period impact of the 2017 Stewart & Stevenson acquisition and stronger oilfield demand.
- The quarter and first six months included an $18.1 million nondeductible expense related to the retirement of the executive Chairman, or approximately $0.30 per share.
- First-quarter results also included $3.3 million of Higman transaction costs, $2.9 million of severance and retirement expenses, and $3.9 million of non-cash employee stock-award-plan expenses.
- Interest expense increased 181% in the quarter and 150% year to date because of acquisition-related and equipment financing.
- Kirby adopted ASC 606 on January 1, 2018 using the modified retrospective method, reducing opening retained earnings by $9.7 million. The new method generally recognizes contract-manufacturing revenue upon shipment rather than under the prior percentage-of-completion approach.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2018 capital expenditures of $265 million to $290 million, funded primarily through operating cash flow and available credit.
- Management expected inland tank-barge utilization in the low-to-mid 90% range during the second half of 2018 and modest mid-single-digit improvement in inland term-contract pricing on renewals.
- Coastal utilization was expected to remain approximately 80%, with continuing excess industry capacity and limited improvement in market fundamentals.
- Management expected reduced Distribution and Services oil and gas revenue and profit in the second half versus the first half because of vendor supply-chain constraints, softer pressure-pumping equipment orders and customer issues involving sand, labor, pricing and pipeline capacity.
- Key risks include economic and industry cycles, excess marine capacity, adverse weather and water conditions, marine accidents, fuel costs, interest rates, regulatory and environmental requirements, competition, supply-chain delays and the timing and magnitude of acquisitions.
- Pollution and marine casualty matters involving the Nathan E. Stewart and M/V Miss Susan remain outstanding. Management believes insurance and reserves are adequate and does not expect a material adverse effect.
- Guarantees, standby letters of credit and performance bonds had aggregate notional value of $20.1 million at June 30, 2018; management did not expect material cash outlays.
Most Important Facts to Verify
- Whether acquisition integration, utilization improvements and industry retirements offset continued pricing pressure in inland and coastal marine markets.
- Whether the expected second-half decline in oilfield-related Distribution and Services activity affects consolidated earnings and cash flow.
- Whether receivables, inventories and deferred revenue under ASC 606 normalize sufficiently to improve operating cash conversion.
- Progress against the $265 million to $290 million 2018 capital-expenditure plan and the financing required for committed vessel construction.
- Debt reduction, covenant compliance, interest-rate exposure and available revolving-credit capacity following the Higman and Targa acquisitions.
- Final purchase-accounting adjustments for Higman and any subsequent developments in environmental, marine casualty or other legal contingencies.