KIRBY CORP quarterly report, Q2 FY2019

Kirby Corporation 2019 Q2 Form 10-Q Summary

Business context and reporting period

Kirby Corporation is the largest domestic tank barge operator, transporting bulk liquid products through U.S. inland and coastal waterways. It also provides engine, transmission and equipment parts, service, rental and oilfield equipment manufacturing through its Distribution and Services segment. This unaudited filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.

Marine transportation represented 52% of second-quarter revenue and 51% of first-half revenue.
Distribution and services represented 48% of second-quarter revenue and 49% of first-half revenue.
As of June 30, 2019, the company operated 1,067 inland tank barges with 23.7 million barrels of capacity and 49 coastal tank barges with 4.7 million barrels of capacity.

Financial performance and key metrics

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Total revenue	$771.0 million	$802.7 million	$1.516 billion	$1.544 billion
Operating income	$75.8 million	$55.9 million	$147.9 million	$106.6 million
Net earnings attributable to Kirby	$47.3 million	$28.6 million	$91.6 million	$61.1 million
Diluted EPS	$0.79	$0.48	$1.53	$1.02
Operating cash flow	Not separately provided	Not separately provided	$188.2 million	$153.8 million

Total revenue declined 4% in the quarter and 2% year to date, while operating income increased 36% and 39%, respectively.
Approximate consolidated operating margin was 9.8% in Q2 2019 versus 7.0% in Q2 2018, and 9.8% for the first six months versus 6.9% in the prior-year period.
Approximate net margin attributable to Kirby was 6.1% in Q2 2019 versus 3.6% in Q2 2018, and 6.0% year to date versus 4.0% in the prior-year period.
Marine transportation revenue increased 7% in both periods. Segment operating income increased 39% in the quarter and 63% year to date; margins improved to 13.2% and 11.5%, respectively, from 10.1% and 7.6%.
Distribution and services revenue declined 14% in the quarter and 10% year to date. Segment operating income declined 42% and 21%, respectively; margins fell to 6.3% and 8.2% from 9.5% and 9.3%.
Cash flow from operations increased 22% year to date. Investing cash outflow was $356.7 million, including $127.3 million of capital expenditures and $252.8 million for acquisitions and marine equipment.

Balance sheet, debt and liquidity

Cash and cash equivalents were $22.5 million at June 30, 2019, compared with $7.8 million at December 31, 2018.
Total assets were $6.233 billion, up 6% from year-end; total equity was $3.322 billion, up 3%.
Long-term debt, net of current portion, was $1.595 billion, up 13% from year-end. Total debt carrying value was approximately $1.595 billion, excluding the small current bank-note balance.
Debt-to-capitalization increased to 32.4% from 30.5% at December 31, 2018. Interest expense increased 24% in the quarter and 29% year to date because of acquisition-related borrowing.
Debt included $103.6 million drawn on the revolving credit facility, a $500.0 million term loan, $500.0 million of Senior Notes Series A and B, and $500.0 million of 2028 Notes, net of $8.9 million of debt discount and issuance costs.
The revolving credit facility provides $850 million of commitments and had $740.8 million available at June 30, 2019. As of August 1, 2019, availability was $823.1 million. The company also had $8.8 million available under a separate credit line.
The company was in compliance with its credit agreement and debt covenants at June 30, 2019.
The company adopted lease accounting standard ASU 2016-02 on January 1, 2019, recognizing operating lease right-of-use assets of $158.9 million and operating lease liabilities of $166.4 million at June 30, 2019.

Material changes and unusual items

The March 2019 acquisition of Cenac’s marine transportation fleet cost $244.5 million and added 63 inland tank barges, 34 inland towboats and two offshore tugboats. The purchase accounting remains provisional.
The company entered into an amended credit agreement in March 2019, extending the $850 million revolving facility to 2024 and adding a $500 million term loan. Term-loan amortization begins June 30, 2020, with 65% of the original principal due at maturity in March 2024.
Marine results benefited from the Cenac acquisition, prior acquisitions, stronger utilization and improved spot and term pricing. Inland utilization averaged in the mid-90% range; coastal utilization averaged in the mid-80% range.
Marine operations experienced unusually high delays from fog, ice, high water, lock maintenance and Houston Ship Channel congestion. Inland delay days increased 92% in the quarter and 86% year to date from the comparable 2018 periods.
Distribution and services results were pressured by declining oilfield activity, lower demand for pressure-pumping equipment, transmissions and related parts and service. Commercial and industrial demand, particularly standby power systems, partially offset the decline.
Prior-year results included a $18.1 million nondeductible charge related to the retirement of the former executive chairman, as well as $3.3 million of Higman acquisition costs and $2.9 million of severance and retirement costs in the 2018 first quarter. These items improved the year-over-year comparison.

Outlook, risks and contingencies

Management projected 2019 capital expenditures of $225 million to $245 million, funded primarily through operating cash flow and available revolving credit.
Management expected inland revenue and operating income to increase in 2019, with inland utilization in the mid-90% range. Third-quarter inland results were expected to increase slightly from the second quarter, although hurricanes and continued high water were expected to affect the quarter.
Coastal revenue and operating income were expected to improve from 2018, with utilization reaching the low-to-mid-80% range. Third-quarter results were expected to be similar to the second quarter, while seasonal declines and vessel maintenance were expected to pressure the fourth quarter.
Management expected oil and gas activity to remain weak through the rest of 2019, with materially lower pressure-pumping equipment deliveries and continued low maintenance, transmission overhaul and parts activity. Oil and gas revenue and operating income were expected to decline in the second half versus the first half.
Commercial and industrial revenue and operating income were expected to exceed 2018, although third-quarter results were expected to decline from the second quarter because of fewer major backup-power installations and lower marine repair activity.
Key risks include economic and industry cycles, oilfield activity and commodity-price volatility, weather and navigational disruptions, marine accidents, environmental laws, fuel costs, interest rates, competition, acquisition execution and covenant compliance.
A May 2019 collision involving Kirby vessels and the M/V Genesis River resulted in a reformate discharge. Kirby filed a limitation action, believes insurance is adequate and believes reserves are sufficient.
Kirby settled Canadian charges related to the 2016 Nathan E. Stewart grounding for approximately C$2.9 million, or $2.2 million, but stated that potential exposure in a related civil proceeding could not be estimated.
Disclosure controls were not effective as of June 30, 2019 because of a previously reported material weakness in internal control over financial reporting. Management expected remediation during 2019, but the weakness was not yet considered remediated.

Facts investors should verify

Whether marine utilization, contract pricing and operating delays support management’s expected 2019 revenue and margin improvement.
The pace and profitability of integration from Cenac and earlier acquisitions, including the final purchase accounting for Cenac.
The severity and duration of the oilfield downturn and its effect on Distribution and Services revenue, margins and inventory.
Refinancing or repayment plans for the $150 million Senior Notes Series A due February 2020 and the term loan amortization beginning June 2020.
Progress in remediating the material weakness in internal controls.
Ultimate costs, insurance recoveries and liability exposure from the Genesis River collision and Nathan E. Stewart-related proceedings.
Actual 2019 capital expenditures compared with the $225 million to $245 million projection and the resulting effect on leverage and liquidity.