Kirby Corporation 2017 Q2 Form 10-Q Summary
Business context and reporting period
Kirby Corporation is the largest domestic tank-barge operator in the United States and provides diesel engine services. Its reportable segments are Marine Transportation and Diesel Engine Services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, compared primarily with the corresponding 2016 periods.
- Marine fleet at June 30, 2017: 849 inland tank barges with 17.4 million barrels of capacity, 67 coastal tank barges with 6.1 million barrels of capacity, and related towboats and tugboats.
- Revenue mix: Marine Transportation 70% and Diesel Engine Services 30% for both the quarter and six months.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $473.3 million | $441.6 million | $965.0 million | $900.3 million |
| Operating income | $47.5 million | $66.8 million | $93.1 million | $132.2 million |
| Net earnings attributable to Kirby | $25.8 million | $38.9 million | $53.3 million | $77.0 million |
| Diluted EPS | $0.48 | $0.72 | $0.99 | $1.43 |
| Operating margin | 10.0% | 15.1% | 9.6% | 14.7% |
- Marine Transportation revenue declined 12% in Q2 and 11% for the six months. Operating income declined 51% and 50%, respectively; margins were 10.8% versus 19.2% in Q2 and 10.5% versus 18.8% for the six months.
- Diesel Engine Services revenue increased 125% in Q2 and 102% for the six months. Operating income improved to $16.4 million and $30.1 million, respectively, from losses of $2.0 million and $2.8 million. Margins improved to 11.5% and 10.4% from negative margins in the comparable periods.
- Net margin attributable to Kirby was approximately 5.4% in Q2 and 5.5% for the six months, compared with approximately 8.8% and 8.6% in the prior-year periods.
- Net cash provided by operating activities was $193.8 million for the six months, down from $211.6 million. Capital expenditures were $92.5 million on the cash flow statement, or $86.2 million reflected in property and equipment.
- Cash and cash equivalents were $1.6 million at June 30, 2017, compared with $5.6 million at December 31, 2016.
- Total debt was approximately $591.5 million, excluding the current portion as presented, compared with $722.8 million at year-end. Debt-to-capitalization declined to 19.3% from 23.1%.
- Debt consisted of $95.4 million outstanding under the revolving credit facility and $500.0 million of senior notes, net of unamortized debt issuance costs in the balance sheet.
- The amended revolving facility has an $850.0 million commitment, matures June 26, 2022, and permits an additional $300.0 million of commitments subject to bank consent. Available capacity was $698.7 million as of August 4, 2017, and the separate $10.0 million credit line had $8.8 million available.
Material changes versus the prior comparable period
- Consolidated revenue increased 7% in Q2 and 7% for the six months, driven by the recovery in Diesel Engine Services, but earnings and margins declined because of pressure in Marine Transportation.
- Marine Transportation was affected by lower inland and coastal contract pricing, weaker coastal utilization, excess barge capacity, increased coastal spot-market exposure, and lower demand for certain refined petroleum and crude-oil movements.
- Inland term-contract renewals were down approximately 4% to 7% on average versus comparable 2016 renewals. Inland utilization was in the mid-80% to high-80% range, while coastal utilization was in the high-60% to mid-70% range.
- Diesel Engine Services benefited from stronger pressure-pumping-unit remanufacturing, transmission overhauls, oilfield equipment manufacturing, and modestly improved engine, transmission, and parts demand.
- The company reduced its inland fleet by 27 barges and approximately 499,000 barrels of capacity during the first half. It also released chartered tugboats, idled equipment, and reduced headcount in response to weak coastal conditions.
- Interest expense included a $187,000 charge for the write-off of deferred financing costs associated with the credit-facility amendment.
- Results included $707,000 of pretax expenses related to the pending Stewart & Stevenson acquisition. The first six months of 2016 included $5.6 million of pretax severance charges.
Guidance, outlook, risks, contingencies, and unusual items
- Management projected 2017 capital expenditures of $165 million to $185 million, funded through operating cash flow and available credit.
- Management expected inland tank-barge utilization of approximately mid-80% to low-90% for the remainder of 2017 and did not expect inland pricing to improve during the year.
- Coastal utilization was expected to remain approximately in the mid-60% to low-70% range because of industry oversupply and additional capacity entering service. Management did not expect coastal supply and demand to balance in 2017 without stronger demand.
- Management expected strong demand for land-based pressure-pumping-unit remanufacturing and related equipment, continued weakness in marine diesel engine services and Gulf of Mexico oilfield services, and a stable power-generation market.
- On July 10, 2017, after quarter-end, Kirby acquired specified inland marine assets for $68 million in cash, financed through the revolving facility. The assets included 13 inland tank barges and three towboats; purchase accounting was not complete at filing.
- Kirby signed an agreement to acquire substantially all of Stewart & Stevenson for approximately $710 million before adjustments and transaction fees, funded with borrowings and approximately $355 million of Kirby common stock. Closing remained subject to specified conditions and third-party consents.
- The pension plan was amended to cease benefit accruals for certain participants after May 31, 2017, reducing the projected benefit obligation by $33.4 million. Management did not expect a pension contribution in 2017 based on current conditions.
- Kirby remains exposed to marine accidents, pollution claims, environmental regulation, weather and navigational delays, fuel costs, interest rates, competition, excess vessel capacity, economic conditions, and acquisition execution risks.
- The company reported contingencies related to the 2016 grounding of the tug Nathan E. Stewart and the 2014 Houston Ship Channel collision. Management believes insurance coverage and recorded reserves are adequate and does not expect the latter incident to have a material adverse effect.
- Guarantees, letters of credit, and performance bonds had aggregate notional value of $13.7 million at June 30, 2017. Management did not expect material cash outlays under these instruments.
- ASU 2016-09 adoption reduced retained earnings by $8.5 million on January 1, 2017. The company was evaluating other pending accounting standards, including revenue recognition, leases, pension-cost presentation, cash-flow classification, and goodwill impairment.
Important facts for investors to verify
- Completion, financing, stock issuance, purchase accounting, and integration risks associated with the Stewart & Stevenson acquisition.
- Post-quarter-end financing impact of the $68 million inland marine asset acquisition.
- Whether inland and coastal utilization, contract pricing, and vessel oversupply improve or deteriorate relative to management’s outlook.
- Diesel Engine Services demand, particularly pressure-pumping-unit remanufacturing, and the sustainability of its return to profitability.
- Actual 2017 capital expenditures versus the $165 million to $185 million forecast and the resulting effect on debt and liquidity.
- Compliance with revolving-credit and senior-note covenants, variable-rate exposure, and refinancing needs as the 2020 and 2023 senior notes approach maturity.
- Developments in the Nathan E. Stewart and Houston Ship Channel matters, including insurance recoveries, reserves, regulatory actions, and potential environmental liabilities.