See accompanying notes to condensed financial statements.
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
| (1) | BASIS FOR PREPARATION OF THE CONDENSED FINANCIAL STATEMENTS |
The condensed financial statements included herein have been prepared by Kirby Corporation (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including significant accounting policies normally included in annual financial statements, have been condensed or omitted pursuant to such rules and regulations. It is suggested that these condensed financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
| (2) | ACCOUNTING STANDARDS ADOPTIONS |
In March 2017,August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-14, “Compensation – Retirement Benefits - Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans” which amends the annual disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing certain requirements, providing clarification on existing requirements and adding new requirements including adding an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The amendments in this update are required to be applied on a retrospective basis to all periods presented. The Company is currently evaluating this guidance to determine the impact on its disclosures.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the recent federal tax reform legislation. ASU 2018-02 eliminates the stranded tax effects resulting from the recent federal tax reform legislation and will improve the usefulness of information reported to financial statement users. The amendments in ASU 2018-02 will be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the recent federal tax reform legislation is recognized. ASU 2018-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period, for which financial statements have not yet been made available for issuance. The Company elected to early adopt ASU 2018-02 in the 2018 first quarter, which resulted in the reclassification of $7,925,000 from accumulated other comprehensive income (loss) to retained earnings due to the change in the federal corporate tax rate.
In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”) which requires employers to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The standard allows only the service cost component to be eligible for capitalization when applicable. ASU 2017-07 is effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted. This standard shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively for the capitalization of the service cost benefit in assets. The Company is currently evaluatingadopted ASU 2017-07 on January 1, 2018 and applied the impact thatstandard retrospectively. The other components of net benefit cost are shown in Note 13, Retirement Plans. As a result of the adoption, for the three months and nine months ended September 30, 2017, the Company reclassified income of this standard will have on its consolidated financial statements.$433,000 and $189,000, respectively, from operating expense into non-operating expense in the condensed statement of earnings.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”) which simplifies the subsequent measurement of goodwill by eliminating Step 2 in the goodwill impairment test that required an entity to perform procedures to determine the fair value of its assets and liabilities at the testing date. An entity instead will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 will be applied prospectively and is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact, if any, that the adoption of this standard will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”) to create consistency in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact thatadopted ASU 2016-15 on January 1, 2018 and the adoption of thisthe standard willdid not have a material impact on itsthe consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”) which simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, forfeitures, minimum statutory tax withholding requirements, classification as either equity or liabilities, and classification on the statement of cash flows. The Company adopted the provisions of ASU 2016-09 on January 1, 2017. ASU 2016-09 requires all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement, thus eliminating additional paid-in capital pools. The Company recognized a cumulative effect adjustment of $8,486,000 to retained earnings on a modified retrospective basis as of January 1, 2017 and will apply the new standard guidance prospectively to all excess tax benefits and tax deficiencies resulting from settlements after January 1, 2017. The standard also requires a policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The Company will elect to account for forfeitures when they occur. Also, the standard requires that excess tax benefits should be classified along with other income tax cash flows as an operating activity on the statement of cash flows, which differs from the Company’s historical classification of excess tax benefits as cash inflows from financing activities. The Company elected to apply this provision using the prospective transition method. Additionally, the standard requires cash paid by an employer when directly withholding shares for tax withholding purposes to be classified in the statement of cash flows as a financing activity, which differs from the Company’s previous method of classification of such cash payments as an operating activity. The Company applied this provision retrospectively and, for the nine months ended September 30, 2016, reclassified $1,753,000, which increased net cash provided by operating activities and net cash used in financing activities.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. AThe method of adoption may be a modified retrospective approach is required.or an approach that utilizes recognizing a cumulative-effect adjustment to the opening balance of retained earnings as of the date of adoption. The Company has formed a project team to evaluate the impact that the adoption of this standard will have on its consolidated financial statements and disclosures. The project team has completed training on the new standard and has started lease review and documentation, butincluding review of practical expedients available. The project team has also selected a software package and continued to load the lease population into the system. The Company has not selected a method of adoption and has not yet determined the effect of ASU 2016-02 on its ongoing financial reporting.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”) which requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this guidance. The guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted the provisions of ASU 2015-17 on January 1, 2017 on a retrospective basis. The December 31, 2016 current deferred tax assets of $13,604,000 have been reclassified in the consolidated balance sheet from current deferred income taxes asset to noncurrent deferred income taxes liability.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”) which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the guidance, an entity should measure inventory that is within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim period or annual reporting period. The Company adopted the provisions of ASU 2015-11 on January 1, 2017 and, based on a lower of cost and net realizable value inventory analysis as of December 31, 2016, no adjustments to inventory value were required. The analysis reflected the inventory values are proper within the guidance of ASU 2015-11.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”Customers (ASC Topic 606)” (“ASU 2014-09” or “ASC 606”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replacereplaces most existing revenue recognition guidance in United States Generally Accepted Accounting Principles when it becomes effective. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year, making itand is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted as of the original effective date.2017. ASU 2014-09 permits the use of either the retrospective, modified retrospective or prospective with a cumulative catch-up approach. The Company has formed a project team to evaluate the standard and determine the effect thatadopted ASU 2014-09 will have on its consolidated financial statementsJanuary 1, 2018 under the modified retrospective approach with a cumulative adjustment that decreased the opening balance of retained earnings by $9,722,000. Prior period amounts were not adjusted and related disclosures.the prior period amounts continue to be reported under the accounting standards in effect for those periods. The project team has completed trainingcumulative adjustment primarily relates to recognition of revenue on certain contract manufacturing activities, primarily construction of new pressure pumping units in the new standardCompany’s distribution and has started contract review and documentation.services segment. The Company has not yet selectedpreviously recognized revenue on manufacturing and assembly projects on a transitionpercentage of completion method nor has it determinedusing measurements of progress towards completion appropriate for the effectwork performed. Upon the adoption of ASU 2014-09, the Company recognizes the revenues on its ongoing financial reporting.contract manufacturing activities upon shipment and transfer of control versus the percentage of completion method.
The following tables summarize the financial statement line items within the Company’s condensed consolidated financial statements impacted by ASU 2014-09 for the three months and nine months ended September 30, 2018 (in thousands):
| | | Three months ended September 30, 2018 | |
| | | As Reported | | | Balances without Adoption of ASC 606 | | | Effect of Change | |
| | | | | | | | | | |
| Statements of earnings: | | | | | | | | | |
| Distribution and services revenues | | $ | 322,805 | | | $ | 349,805 | | | $ | (27,000 | ) |
| Costs of sales and operating expenses | | $ | 498,421 | | | $ | 520,721 | | | $ | (22,300 | ) |
| Operating income | | $ | 67,957 | | | $ | 72,657 | | | $ | (4,700 | ) |
| Earnings before taxes on income | | $ | 57,066 | | | $ | 61,766 | | | $ | (4,700 | ) |
| Provision for taxes on income | | $ | (15,116 | ) | | $ | (16,282 | ) | | $ | 1,166 | |
| Net earnings attributable to Kirby | | $ | 41,816 | | | $ | 45,350 | | | $ | (3,534 | ) |
| | | | | �� | | | | | | | | |
| Statements of comprehensive income: | | | | | | | | | | | | |
| Net earnings | | $ | 41,950 | | | $ | 45,484 | | | $ | (3,534 | ) |
| Comprehensive income attributable to Kirby | | $ | 42,194 | | | $ | 45,728 | | | $ | (3,534 | ) |
| | | Nine months ended September 30, 2018 | |
| | | As Reported | | | Balances without Adoption of ASC 606 | | | Effect of Change | |
| | | | | | | | | | |
| Statements of earnings: | | | | | | | | | |
| Distribution and services revenues | | $ | 1,148,598 | | | $ | 1,154,398 | | | $ | (5,800 | ) |
| Costs of sales and operating expenses | | $ | 1,640,366 | | | $ | 1,645,166 | | | $ | (4,800 | ) |
| Operating income | | $ | 174,530 | | | $ | 175,530 | | | $ | (1,000 | ) |
| Earnings before taxes on income | | $ | 144,451 | | | $ | 145,451 | | | $ | (1,000 | ) |
| Provision for taxes on income | | $ | (41,042 | ) | | $ | (41,295 | ) | | $ | 253 | |
| Net earnings attributable to Kirby | | $ | 102,889 | | | $ | 103,636 | | | $ | (747 | ) |
| | | | | | | | | | | | | |
| Statements of comprehensive income: | | | | | | | | | | | | |
| Net earnings | | $ | 103,409 | | | $ | 104,156 | | | $ | (747 | ) |
| Comprehensive income attributable to Kirby | | $ | 95,750 | | | $ | 96,497 | | | $ | (747 | ) |
| | | | | | | | | | | | | |
| Statements of cash flows: | | | | | | | | | | | | |
| Net earnings | | $ | 103,409 | | | $ | 104,156 | | | $ | (747 | ) |
| Provision for deferred income taxes | | $ | 36,838 | | | $ | 36,585 | | | $ | 253 | |
| Decrease in cash flows resulting from changes in operating assets and liabilities, net | | $ | (66,707 | ) | | $ | (67,201 | ) | | $ | 494 | |
The following table summarizes the balance sheet line items within the Company’s condensed consolidated financial statements as of September 30, 2018 impacted by ASU 2014-09 (in thousands):
| | | September 30, 2018 | |
| | | As Reported | | | Balances without Adoption of ASC 606 | | | Effect of Change | |
| Balance sheets: | | | | | | | | | |
| Trade receivables | | $ | 400,870 | | | $ | 466,599 | | | $ | (65,729 | ) |
| Inventories – net | | $ | 453,173 | | | $ | 395,773 | | | $ | 57,400 | |
| Total assets | | $ | 5,854,332 | | | $ | 5,862,661 | | | $ | (8,329 | ) |
| Deferred revenues | | $ | 75,843 | | | $ | 70,372 | | | $ | 5,471 | |
| Deferred income taxes | | $ | 544,882 | | | $ | 548,235 | | | $ | (3,353 | ) |
| Retained earnings | | $ | 2,748,029 | | | $ | 2,758,476 | | | $ | (10,447 | ) |
| Total liabilities and equity | | $ | 5,854,332 | | | $ | 5,862,661 | | | $ | (8,329 | ) |
The following table sets forth the Company’s revenues by major source for the three months and nine months ended September 30, 2018 and 2017 (in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| Marine transportation segment: | | | | | | | | | | | | |
| Inland transportation | | $ | 288,573 | | | $ | 220,177 | | | $ | 827,848 | | | $ | 681,879 | |
| Coastal transportation | | | 93,467 | | | | 98,633 | | | | 272,758 | | | | 311,848 | |
| | | $ | 382,040 | | | $ | 318,810 | | | $ | 1,100,606 | | | $ | 993,727 | |
| Distribution and services segment: | | | | | | | | | | | | | | | | |
| Oil and gas | | $ | 201,475 | | | $ | 159,492 | | | $ | 780,825 | | | $ | 350,295 | |
| Commercial and industrial | | | 121,330 | | | | 62,972 | | | | 367,773 | | | | 162,285 | |
| | | $ | 322,805 | | | $ | 222,464 | | | $ | 1,148,598 | | | $ | 512,580 | |
The Company’s revenue is measured based on consideration specified in its contracts with its customers. The Company recognizes revenue as it satisfies performance obligations in its contracts which occur as the Company delivers a service over time to its customers, or transfers control over a part or product to its customer.
Marine Transportation Revenues. The Company’s marine transportation segment utilizes contracts with its customers to transport cargo from a designated origin to a designated destination at a set rate or at a daily rate. The Company uses a voyage accounting method of revenue recognition for its marine transportation revenues which allocates voyage revenue based on the percent of the voyage completed during the period. The performance of the service is invoiced as the transaction occurs and payment is required depending on each specific customer’s credit terms.
Distribution and Services Revenues. Distribution products and services are generally sold based upon purchase orders or preferential service agreements with the customer that include fixed or determinable prices. Parts sales are recognized when control transfers to the customer, generally when title passes upon shipment to customers. Service revenue is recognized over time as the service is provided using measures of progress utilizing hours worked or costs incurred as a percentage of estimated hours or expected costs. Revenue from rental agreements is recognized on a straight-line basis over the rental period. The Company recognizes the revenues on contract manufacturing activities upon shipment and transfer of control to the customer. The transactions in the distribution and services segment are typically invoiced as parts are shipped or upon the completion of the service job. Contract manufacturing activities are generally invoiced upon shipment and the Company will often get deposits from its customers prior to starting work, or progress payments during the project depending on the credit worthiness of the customer and the size of the project.
Prior to the adoption of ASU 2014-09, distribution and services manufacturing and assembly projects revenue was reported on the percentage of completion method of accounting using measurements of progress towards completion appropriate for the work performed. Upon the adoption of ASU 2014-09 on January 1, 2018, the Company recognizes the revenues on contract manufacturing activities upon shipment and transfer of control versus the percentage of completion method.
Contract Assets and Liabilities. Contract liabilities represent advance consideration received from customers, and are recognized as revenue over time as the related performance obligation is satisfied. The amount of revenue recognized in the 2018 first nine months that was included in the opening contract liability balance was $39,492,000. The Company has recognized all contract liabilities within the deferred revenues financial statement caption on the balance sheet. The Company expects to recognize revenue of $35,836,000 in the 2018 fourth quarter and $40,007,000 in 2019 related to deferred revenue as of September 30, 2018. The Company did not have any contract assets at September 30, 2018 or December 31, 2017.
Performance Obligations. The Company applies the practical expedient in ASC 606-10-50-14(a) and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
On September 13, 2017,May 10, 2018, the Company completed the purchase of Targa Resources Corp.’s (“Targa”) inland tank barge business from a subsidiary of Targa for $69,250,000 in cash. Targa’s inland tank barge fleet consisted of 16 pressure barges with a total capacity of 258,000 barrels, many of which were under multi-year contracts that the Company assumed from Targa. The 16 tank barges transport petrochemicals on the Mississippi River System and the Gulf Intracoastal Waterway. As a result of the acquisition, the Company recorded $16,116,000 of goodwill and $11,000,000 of intangibles with an average amortization period of 15 years. The Company expects all of the goodwill to be deductible for tax purposes.
On March 15, 2018, the Company purchased two inland pressure tank barges from a competitor for $10,400,000 in cash. The average age of the two tank barges was five years.
On February 14, 2018, the Company completed the acquisition of substantially allHigman Marine, Inc. and its affiliated companies (“Higman”) for $421,922,000 in cash, subject to certain post-closing adjustments. Higman’s fleet consisted of 163 inland tank barges, including two barges to be leased upon completion of their construction in 2018, with 4.8 million barrels of capacity, and 75 inland towboats, transporting petrochemicals, black oil, including crude oil and natural gas condensate, and refined petroleum products on the Mississippi River System and the Gulf Intracoastal Waterway. The average age of the assetsinland tank barges was approximately seven years and the inland towboats had an average age of Stewart & Stevenson LLC (“S&S”), a global manufacturer and distributor of products and services for the oil and gas, marine, construction, power generation, transportation, mining and agricultural industries. The acquired business, which the Company operates through a newly formed subsidiary renamed Stewart & Stevenson LLC after the closingapproximately eight years. Financing of the acquisition was founded in 1902 and serves domestic and global markets with equipment, rental solutions, parts and service through a strategic network of sales and service centers in domestic and international locations.
The total value of the transaction was $758,245,000, before post-closing adjustments and excluding transaction fees, consisting of cash consideration of $377,967,000, the assumption of $13,724,000 of debt and $366,554,000 through the issuance of 5,696,259 shares$500,000,000 of Company common stock valued at $64.35 per share, the Company’s4.2% senior unsecured notes due March 1, 2028 (the “2028 Notes”). The 2028 Notes were issued on February 12, 2018 in preparation for closing share price on September 13, 2017. On June 26, 2017, in advance of the purchase of S&S, the Company entered into an amendment of its revolving credit facility that increased the borrowing limit from $550,000,000 to $850,000,000 and extended the maturity date to June 26, 2022. The debt assumed consists of $12,135,000 of term debt and $1,589,000 of short-term secured loans related to the Company’s South American operations. The term debt has a maturity date of September 15, 2032 and carries an interest rate of 4.0%. The term debt has quarterly interest payments plus quarterly principal payments of $375,000 due through December 2022 and $99,000 due thereafter through the maturity date. The term debt can be paid off prior to maturity without penalty.
S&S, headquartered in Houston, Texas with 42 branches across 12 states, is a distributor in certain geographic areas for Allison Transmission, MTU Detroit Diesel, Electro-Motive Diesel, Deutz and several other manufacturers. S&S’ principal customers are oilfield service companies, oil and gas operators and producers, and companies in the marine, construction, power generation, transportation, mining and agricultural industries.acquisition.
The Company considers S&SHigman to be a natural extension of the current distribution and servicesmarine transportation segment, expanding its geographic footprint andthe capabilities of the distributionCompany’s inland based marine transportation business and services business.lowering the average age of its inland tank barge and towboat fleet.
Total consideration transferred was as follows (in thousands):
| Cash consideration paid | | $ | 377,967 | |
| Stock consideration through issuance of Company common stock | | | 366,554 | |
| Fair value of consideration transferred | | $ | 744,521 | |
The fair values of the assets acquired and liabilities assumed recorded at the acquisition date were as follows (in thousands):
| Assets: | | | | | | |
| Cash | | $ | 98 | | | $ | 2,313 | |
| Accounts receivable | | | 97,891 | | | | 27,527 | |
| Inventories | | | 150,000 | | |
| Prepaid expenses and other current assets | | | 3,850 | | | | 5,323 | |
| Property and equipment | | | 150,652 | | | | 497,951 | |
| Goodwill | | | 317,861 | | | | 8,134 | |
| Other assets | | | 163,230 | | | | 31 | |
| Total assets | | $ | 883,582 | | | $ | 541,279 | |
| Liabilities: | | | | | | |
| Current portion of long-term debt | | $ | 1,501 | | |
| Bank notes payable | | | 1,589 | | |
| Income taxes payable | | | 850 | | |
| Accounts payable | | | 72,200 | | | | 17,012 | |
| Accrued liabilities | | | 31,803 | | | | 14,127 | |
| Deferred revenues | | | 18,806 | | |
| Long-term debt | | | 10,634 | | |
| Deferred income taxes | | | | 42,392 | |
| Other long-term liabilities | | | 1,678 | | | | 45,826 | |
| Total liabilities | | $ | 139,061 | | | $ | 119,357 | |
| Net assets acquired | | $ | 744,521 | | | $ | 421,922 | |
The analysis of the S&SHigman fair values is substantially complete but all fair values have not been finalized pending obtaining the information necessary to complete the analysis. As additional information becomes known concerning the assets acquired and liabilities assumed, the Company may make adjustments to the opening balance sheet of S&SHigman up to a one year period following the acquisition date.
As a result of the acquisition, the Company recorded $317,861,000$8,134,000 of goodwill and $160,822,000 of net intangibles.which the majority will be deductible for tax purposes. The net intangibles haveCompany also incurred $11,100,000 of intangible liabilities related to unfavorable contracts with a weighted average amortization period of approximately 16.84.9 years. The Company expects substantially all of the goodwill will be deductible for tax purposes. Acquisition related costs of $1,471,000,$3,379,000, consisting primarily of legal, audit and other professional fees plus other expenses, were expensed as incurred to selling, general and administrative expense in the 2018 first nine months of 2017.
On July 10, 2017, the Company completed the purchase of certain inland marine assets from an undisclosed competitor for $68,000,000 in cash. The assets purchased consisted of nine specialty pressure tank barges, four 30,000 barrel tank barges and three 1320 horsepower inland towboats. The average age of the 13 inland tank barges was five years. The 13 tank barges transport petrochemicals and refined petroleum products on the Mississippi River System and the Gulf Intracoastal Waterway. As a result of the acquisition, the Company recorded $67,970,000 of property and $30,000 of intangibles with a weighted average amortization period of two years.
During July 2017, the Company purchased four inland tank barges for $1,450,000 as well as a barge fleeting and marine fueling operation business in Freeport, Texas for $3,900,000.months.
Pro forma results of the acquisitions made in the 20172018 first nine months have not been presented as the pro forma revenues, earnings before taxes on income, net earnings and net earnings per share would not be materially different from the Company’s actual results.
The following table presents the details of inventories as of September 30, 20172018 and December 31, 20162017 (in thousands):
| | | | September 30, 2018 | | | December 31, 2017 | |
| | | September 30, 2017 | | | December 31, 2016 | | | | | | | |
| Finished goods | | $ | 280,393 | | | $ | 178,740 | | | $ | 336,703 | | | $ | 242,333 | |
| Work in process | | | 43,010 | | | | 6,662 | | | | 116,470 | | | | 73,396 | |
| | | $ | 323,403 | | | $ | 185,402 | | | $ | 453,173 | | | $ | 315,729 | |
(5)(6) | FAIR VALUE MEASUREMENTS |
The estimated fair value of total debt outstanding at September 30, 20172018 and December 31, 20162017 was $1,025,773,000$1,369,932,000 and $715,330,000,$984,017,000, respectively, which differs from the carrying amounts of $1,033,428,000$1,399,931,000 and $722,802,000,$992,406,000, respectively, included in the consolidated financial statements. The fair value was determined using an income approach that relies on inputs such as yield curves. Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities have carrying values that approximate fair value due to the short-term maturity of these financial instruments.
Certain assets are measured at fair value on a nonrecurring basis. These assets are adjusted to fair value when there is evidence of impairment. During the nine months ended2017 fourth quarter, the Company reduced certain vessels to fair value due to its decision to put certain older out-of-service vessels up for sale in its marine transportation segment. The fair value of these vessels was $12,550,000 at December 31, 2017, and is presented in prepaid expenses and other current assets.
On February 12, 2018, the Company issued $500,000,000 of 4.2% senior unsecured notes due March 1, 2028 with U.S. Bank National Association, as trustee. Interest payments of $10,500,000 are due semi-annually on March 1 and September 30, 2017, there1 of each year, with the exception of the first payment on September 1, 2018, which was no indication that$11,608,000. The Company received cash proceeds of $495,019,000, net of the original issue discount of $705,000 and debt issuance costs of $4,276,000. The 2028 Notes are unsecured and rank equally in right of payment with the Company’s long-lived assetsother unsecured senior indebtedness. The 2028 Notes contain certain covenants on the part of the Company, including covenants relating to liens, sale-leasebacks, asset sales and mergers, among others. The 2028 Notes also specify certain events of default, upon the occurrence of which the maturity of the notes may be accelerated, including failure to pay principal and interest, violation of covenants or default on other indebtedness, among others. The Company used the proceeds from the issuance of the 2028 Notes to fund the acquisition of Higman. The remaining net proceeds of the sale of the 2028 Notes were impaired, and accordingly, measurement at fair value was not required.used for the repayment of indebtedness under the Company’s bank credit facilities.
The Company has share-based compensation plans which are described below. The compensation cost that has been charged against earnings for the Company’s stock award plans and the income tax benefit recognized in the statement of earnings for stock awards for the three months and nine months ended September 30, 20172018 and 20162017 were as follows (in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| Compensation cost | | $ | 3,067 | | | $ | 3,296 | | | $ | 8,991 | | | $ | 8,841 | | | $ | 3,098 | | | $ | 3,067 | | | $ | 16,649 | | | $ | 8,991 | |
| Income tax benefit | | $ | 1,234 | | | $ | 1,236 | | | $ | 3,386 | | | $ | 3,315 | | | $ | 709 | | | $ | 1,234 | | | $ | 4,747 | | | $ | 3,386 | |
The Company has an employee stock award plan for selected officers and other key employees which provides for the issuance of stock options, restricted stock awards and performance awards. On February 19, 2018, the employee stock award plan was amended to also allow for the granting of restricted stock units (“RSUs”) to selected officers and other key employees. The amendment included a provision for the continued vesting of unvested stock options and RSUs for employees who meet certain years of service and age requirements at the time of their retirement. The vesting change resulted in shorter expense accrual periods on stock options and RSUs granted after February 19, 2018 to employees who are nearing retirement and meet the service and age requirements.
The exercise price for each option equals the fair market value per share of the Company’s common stock on the date of grant. Substantially all stock options outstanding under the plan have terms of seven years and vest ratably over three years. No performance awards payable in stock have been awarded under the plan. At September 30, 2017, 1,775,5222018, 1,573,527 shares were available for future grants under the employee plan and no outstanding stock options under the employee plan were issued with stock appreciation rights.
The following is a summary of the stock option activity under the employee plan described above for the nine months ended September 30, 2017:2018:
| | Outstanding Non- Qualified or Nonincentive Stock Awards | | | Weighted Average Exercise Price | | | Outstanding Non- Qualified or Nonincentive Stock Awards | | | Weighted Average Exercise Price | |
| Outstanding at December 31, 2016 | | | 601,121 | | | $ | 65.33 | | |
| Outstanding at December 31, 2017 | | | | 654,655 | | | $ | 66.45 | |
| Granted | | | 123,051 | | | $ | 68.46 | | | | 115,797 | | | $ | 75.50 | |
| Exercised | | | (21,135 | ) | | $ | 36.50 | | | | (283,886 | ) | | $ | 67.71 | |
| Forfeited | | | (17,022 | ) | | $ | 62.37 | | | | (21,864 | ) | | $ | 102.42 | |
| Outstanding at September 30, 2017 | | | 686,015 | | | $ | 66.85 | | |
| Outstanding at September 30, 2018 | | | | 464,702 | | | $ | 69.85 | |
The following table summarizes information about the Company’s outstanding and exercisable stock options under the employee plan at September 30, 2017:2018:
| | | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | | Number Outstanding | | | Weighted Average Remaining Contractual Life in Years | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Number Exercisable | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| $ | 46.74 - $51.23 | | | | 201,276 | | | | 3.9 | | | $ | 49.97 | | | | | 104,306 | | | $ | 48.79 | | |
| $ | 64.65 - $74.99 | | | | 415,598 | | | | 4.1 | | | $ | 69.76 | | | | | 237,022 | | | $ | 70.31 | | |
| $ | 93.64 - $96.85 | | | | 33,987 | | | | 3.3 | | | $ | 94.31 | | | | | 33,987 | | | $ | 94.31 | | |
| $ | 101.46 - $104.37 | | | | 35,154 | | | | 3.1 | | | $ | 102.60 | | | | | 35,154 | | | $ | 102.60 | | |
| $ | 46.74 - $104.37 | | | | 686,015 | | | | 4.0 | | | $ | 66.85 | | $ | 3,284,000 | | | 410,469 | | | $ | 69.60 | | $ | 1,822,000 |
| | | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | | Number Outstanding | | | Weighted Average Remaining Contractual Life in Years | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Number Exercisable | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| $51.23 | | | | 90,975 | | | | 4.3 | | | $ | 51.23 | | | | | 57,438 | | | $ | 51.23 | | |
| $64.65 - $68.50 | | | | 126,260 | | | | 5.0 | | | $ | 67.23 | | | | | 41,116 | | | $ | 67.40 | | |
| $70.65 - $75.50 | | | | 207,156 | | | | 4.7 | | | $ | 74.56 | | | | | 91,359 | | | $ | 73.36 | | |
| $93.64 - $101.46 | | | | 40,311 | | | | 2.4 | | | $ | 95.90 | | | | | 40,311 | | | $ | 95.90 | | |
| $51.23 - $101.46 | | | | 464,702 | | | | 4.5 | | | $ | 69.85 | | $6,312,000 | | | 230,224 | | | $ | 70.72 | | $3,204,000 |
The following is a summary of the restricted stock award activity under the employee plan described above for the nine months ended September 30, 2017:2018:
| | | Unvested Restricted Stock Award Shares | | | Weighted Average Grant Date Fair Value Per Share | |
| Nonvested balance at December 31, 2016 | | | 377,655 | | | $ | 66.14 | |
| Granted | | | 127,130 | | | $ | 68.50 | |
| Vested | | | (105,430 | ) | | $ | 68.93 | |
| Forfeited | | | (21,169 | ) | | $ | 68.99 | |
| Nonvested balance at September 30, 2017 | | | 378,186 | | | $ | 66.00 | |
| | | Unvested Restricted Stock Award Shares | | | Weighted Average Grant Date Fair Value Per Share | |
| Nonvested balance at December 31, 2017 | | | 364,121 | | | $ | 65.84 | |
| Vested | | | (144,240 | ) | | $ | 72.66 | |
| Forfeited | | | (3,949 | ) | | $ | 64.68 | |
| Nonvested balance at September 30, 2018 | | | 215,932 | | | $ | 64.73 | |
The following is a summary of RSU activity under the employee plan described above for the nine months ended September 30, 2018:
| | | Unvested RSUs | | | Weighted Average Grant Date Fair Value Per Unit | |
| Nonvested balance at December 31, 2017 | | | — | | | $ | — | |
| Granted | | | 143,890 | | | $ | 75.59 | |
| Forfeited | | | (2,105 | ) | | $ | 75.50 | |
| Nonvested balance at September 30, 2018 | | | 141,785 | | | $ | 75.59 | |
The Company has a stock award plan for nonemployee directors of the Company which provides for the issuance of stock options and restricted stock. The director plan provides for automatic grants of restricted stock to nonemployee directors after each annual meeting of stockholders. In addition, the director plan allows for the issuance of stock options or restricted stock in lieu of cash for all or part of the annual director fee at the option of the director. The exercise prices for all options granted under the plan are equal to the fair market value per share of the Company’s common stock on the date of grant. The terms of the options are ten years. The restricted stock issued after each annual meeting of stockholders vests six months after the date of grant. Options granted and restricted stock issued in lieu of cash director fees vest in equal quarterly increments during the year to which they relate. At September 30, 2017, 510,0712018, 486,058 shares were available for future grants under the director plan. The director stock award plan is intended as an incentive to attract and retain qualified independent directors.
The following is a summary of the stock option activity under the director plan described above for the nine months ended September 30, 2017:2018:
| | Outstanding Non- Qualified or Nonincentive Stock Options | | | Weighted Average Exercise Price | |
| Outstanding at December 31, 2016 | | | 205,429 | | | $ | 64.60 | |
| Granted | | | 3,188 | | | $ | 70.65 | |
| Exercised | | | (39,000 | ) | | $ | 46.23 | |
| Forfeited | | | (12,000 | ) | | $ | 87.35 | |
| Outstanding at September 30, 2017 | | | 157,617 | | | $ | 67.54 | |
| | | Outstanding Non-Qualified or Nonincentive Stock Options | | | Weighted Average Exercise Price | |
| Outstanding at December 31, 2017 | | | 157,617 | | | $ | 67.54 | |
| Granted | | | 2,640 | | | $ | 85.30 | |
| Exercised | | | (29,153 | ) | | $ | 57.47 | |
| Outstanding at September 30, 2018 | | | 131,104 | | | $ | 70.14 | |
The following table summarizes information about the Company’s outstanding and exercisable stock options under the director plan at September 30, 2017:2018:
| | | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | | Number Outstanding | | | Weighted Average Remaining Contractual Life in Years | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Number Exercisable | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| $ | 29.60 | | | | 6,000 | | | | 1.6 | | | $ | 29.60 | | | | | 6,000 | | | $ | 29.60 | | |
| $ | 41.24 – $56.45 | | | | 53,276 | | | | 2.7 | | | $ | 52.77 | | | | | 53,276 | | | $ | 52.77 | | |
| $ | 61.89 – $62.48 | | | | 35,153 | | | | 4.8 | | | $ | 62.31 | | | | | 35,153 | | | $ | 62.31 | | |
| $ | 70.65 – $99.52 | | | | 63,188 | | | | 6.3 | | | $ | 86.50 | | | | | 61,594 | | | $ | 86.91 | | |
| $ | 29.60 – $99.52 | | | | 157,617 | | | | 4.5 | | | $ | 67.54 | | $ | 1,048,000 | | | 156,023 | | | $ | 67.51 | | $ | 1,048,000 |
| | | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | | Number Outstanding | | | Weighted Average Remaining Contractual Life in Years | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Number Exercisable | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| $29.60 | | | | 6,000 | | | | 0.6 | | | $ | 29.60 | | | | | 6,000 | | | $ | 29.60 | | |
| $41.24 – $56.45 | | | | 31,276 | | | | 2.2 | | | $ | 50.61 | | | | | 31,276 | | | $ | 50.61 | | |
| $61.89 – $62.48 | | | | 28,000 | | | | 3.8 | | | $ | 62.27 | | | | | 28,000 | | | $ | 62.27 | | |
| $70.65 – $99.52 | | | | 65,828 | | | | 5.4 | | | $ | 86.45 | | | | | 64,508 | | | $ | 86.48 | | |
| $29.60 – $99.52 | | | | 131,104 | | | | 4.1 | | | $ | 70.14 | | $2,114,000 | | | 129,784 | | | $ | 69.98 | | $2,114,000 |
The following is a summary of the restricted stock award activity under the director plan described above for the nine months ended September 30, 2017:2018:
| | | Unvested Restricted Stock Award Shares | | | Weighted Average Grant Date Fair Value Per Share | | | Unvested Restricted Stock Award Shares | | | Weighted Average Grant Date Fair Value Per Share | |
| Nonvested balance at December 31, 2016 | | | 347 | | | $ | 64.89 | | |
| | | | | | | | |
| Nonvested balance at December 31, 2017 | | | | 319 | | | $ | 70.65 | |
| Granted | | | 21,198 | | | $ | 70.65 | | | | 21,373 | | | $ | 85.70 | |
| Vested | | | (985 | ) | | $ | 68.62 | | | | (847 | ) | | $ | 79.78 | |
| Nonvested balance at September 30, 2017 | | | 20,560 | | | $ | 70.65 | | |
| Nonvested balance at September 30, 2018 | | | | 20,845 | | | $ | 85.71 | |
The total intrinsic value of all stock options exercised under all of the Company’s plans was $1,585,000$6,709,000 and $266,000$1,585,000 for the nine months ended September 30, 20172018 and 2016,2017, respectively. The actual tax benefit realized for tax deductions from stock option exercises was $597,000$1,912,000 and $100,000$597,000 for the nine months ended September 30, 20172018 and 2016,2017, respectively.
The total intrinsic value of all the restricted stock vestings under all of the Company’s plans was $7,046,000$11,454,000 and $5,587,000$7,046,000 for the nine months ended September 30, 20172018 and 2016,2017, respectively. The actual tax benefit realized for tax deductions from restricted stock vestings was $2,654,000$3,264,000 and $2,095,000$2,654,000 for the nine months ended September 30, 20172018 and 2016,2017, respectively.
There were no RSU vestings for the nine months ended September 30, 2018.
As of September 30, 2017,2018, there was $3,744,000$2,770,000 of unrecognized compensation cost related to nonvested stock options, and $19,777,000$10,296,000 related to nonvested restricted stock.stock awards and $6,227,000 related to nonvested RSUs. The stock options are expected to be recognized over a weighted average period of approximately 1.61.7 years, restricted stock awards over approximately 2.3 years and restricted stockRSUs over approximately 3.24.1 years. The total fair value of options vested was $2,511,000$3,170,000 and $2,495,000$2,511,000 during the nine months ended September 30, 20172018 and 2016,2017, respectively. The fair value of the restricted stock vested was $7,046,000$11,454,000 and $5,587,000$7,046,000 for the nine months ended September 30, 20172018 and 2016,2017, respectively.
The weighted average per share fair value of stock options granted during the nine months ended September 30, 2018 and 2017 was $23.53 and 2016 was $20.72, and $17.30, respectively. The fair value of the stock options granted during the nine months ended September 30, 2018 and 2017 was $2,787,000 and 2016 was $2,616,000, and $3,231,000, respectively. The Company currently uses treasury stock shares for restricted stock grants and stock option exercises. The fair value of each stock option was determined using the Black-Scholes option pricing model. The key input variables used in valuing the options during the nine months ended September 30, 20172018 and 20162017 were as follows:
| | Nine months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2018 | | | 2017 | |
| Dividend yield | | None | | | None | | | None | | | None | |
| Average risk-free interest rate | | | 2.0% | | | | 1.5% | | | | 2.7 | % | | | 2.0 | % |
| Stock price volatility | | | 27% | | | | 30% | | | | 27 | % | | | 27 | % |
| Estimated option term | | Six years | | | Six years | | | Six years | | | Six years | |
(7)(9) | OTHER COMPREHENSIVE INCOME |
The Company’s changes in other comprehensive income for the three months and nine months ended September 30, 20172018 and 20162017 were as follows (in thousands):
| | | Three months ended September 30, | |
| | | 2017 | | | 2016 | |
| | | Gross Amount | | | Income Tax (Provision) Benefit | | | Net Amount | | | Gross Amount | | | Income Tax (Provision) Benefit | | | Net Amount | |
| Pension and postretirement benefits (a): | | | | | | | | | | | | | | | | | | |
| Amortization of net actuarial loss | | $ | 822 | | | $ | (315 | ) | | $ | 507 | | | $ | 1,193 | | | $ | (455 | ) | | $ | 738 | |
| Actuarial losses | | | — | | | | — | | | | — | | | | (2 | ) | | | (1 | ) | | | (3 | ) |
| Foreign currency translation | | | (164 | ) | | | — | | | | (164 | ) | | | — | | | | — | | | | — | |
| Total | | $ | 658 | | | $ | (315 | ) | | $ | 343 | | | $ | 1,191 | | | $ | (456 | ) | | $ | 735 | |
| | | Nine months ended September 30, | | | Three months ended September 30, | |
| | | 2017 | | | 2016 | | | 2018 | | | 2017 | |
| | | Gross Amount | | | Income Tax (Provision) Benefit | | | Net Amount | | | Gross Amount | | | Income Tax (Provision) Benefit | | | Net Amount | | | Gross Amount | | | Income Tax (Provision) Benefit | | | Net Amount | | | Gross Amount | | | Income Tax (Provision) Benefit | | | Net Amount | |
| Pension and postretirement benefits (a): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization of net actuarial loss | | $ | 2,939 | | | $ | (1,125 | ) | | $ | 1,814 | | | $ | 3,575 | | | $ | (1,367 | ) | | $ | 2,208 | | | $ | 580 | | | $ | (142 | ) | | $ | 438 | | | $ | 822 | | | $ | (315 | ) | | $ | 507 | |
| Actuarial gains (losses) | | | 22,014 | | | | (8,435 | ) | | | 13,579 | | | | (6,437 | ) | | | 2,464 | | | | (3,973 | ) | |
| Foreign currency translation | | | (164 | ) | | | — | | | | (164 | ) | | | — | | | | — | | | | — | | | | (60 | ) | | | — | | | | (60 | ) | | | (164 | ) | | | — | | | | (164 | ) |
| Total | | $ | 24,789 | | | $ | (9,560 | ) | | $ | 15,229 | | | $ | (2,862 | ) | | $ | 1,097 | | | $ | (1,765 | ) | | $ | 520 | | | $ | (142 | ) | | $ | 378 | | | $ | 658 | | | $ | (315 | ) | | $ | 343 | |
| | | Nine months ended September 30, | |
| | | 2018 | | | 2017 | |
| | | Gross Amount | | | Income Tax (Provision) Benefit | | | Net Amount | | | Gross Amount | | | Income Tax (Provision) Benefit | | | Net Amount | |
| Pension and postretirement benefits (a): | | | | | | | | | | | | | | | | | | |
| Amortization of net actuarial loss | | $ | 1,739 | | | $ | (423 | ) | | $ | 1,316 | | | $ | 2,939 | | | $ | (1,125 | ) | | $ | 1,814 | |
| Actuarial gains (losses) | | | (609 | ) | | | 148 | | | | (461 | ) | | | 22,014 | | | | (8,435 | ) | | | 13,579 | |
| Adoption of ASU 2018-02 – reclassification to retained earnings | | | — | | | | (7,925 | ) | | | (7,925 | ) | | | — | | | | — | | | | — | |
| Foreign currency translation | | | (69 | ) | | | — | | | | (69 | ) | | | (164 | ) | | | — | | | | (164 | ) |
| Total | | $ | 1,061 | | | $ | (8,200 | ) | | $ | (7,139 | ) | | $ | 24,789 | | | $ | (9,560 | ) | | $ | 15,229 | |
| (a) | Actuarial gains/(losses) are amortized into costs of sales and operating expenses or selling, general and administrative expenses as appropriate.other income (expense). (See Note 1113 – Retirement Plans) |
The Company’s operations are aggregated into two reportable business segments as follows:
Marine Transportation — Provides marine transportation principally by United States flag vessels of liquid cargoes throughout the United States inland waterway system, along all three United States coasts, in Alaska and Hawaii and, to a lesser extent, in United States coastal transportation of dry-bulk cargoes. The principal products transported include petrochemicals, black oil, refined petroleum products and agricultural chemicals.
Distribution and Services— Provides after-market serviceservices and parts for engines, transmissions, reduction gears and related equipment used in oilfield services,service, marine, power generation, mining, on-highway, and other industrial applications. The Company also rents equipment including generators, fork lifts, pumps and compressors for use in a variety of industrial markets, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, for the land-based oilfield service and oil and gas operator and producer markets.markets.
The Company’s two reportable business segments are managed separately based on fundamental differences in their operations. The Company evaluates the performance of its segments based on the contributions to operating income of the respective segments, and before income taxes, interest, gains or losses on disposition of assets, other nonoperating income, noncontrolling interests, accounting changes, and nonrecurring items. Intersegment revenues, based on market-based pricing, of the distribution and services segment from the marine transportation segment of $5,837,000 and $21,757,000 for the three months and nine months ended September 30, 2018, respectively, and $4,967,000 and $15,342,000 for the three months and nine months endingended September 30, 2017, respectively, and $7,171,000 and $17,722,000 for the three months and nine months ending September 30, 2016, respectively, have been eliminated from the tables below. The related intersegment profit of $584,000 and $2,176,000 for the three months and nine months ending September 30, 2018, respectively, and $497,000 and $1,534,000 for the three months and nine months ending September 30, 2017, respectively, and $717,000 and $1,772,000 for the three months and nine months ending September 30, 2016, respectively, have also been eliminated from the tables below.
The following table sets forth the Company’s revenues and profit or loss by reportable segment for the three months and nine months ended September 30, 20172018 and 20162017 and total assets as of September 30, 20172018 and December 31, 20162017 (in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
| Marine transportation | | $ | 318,810 | | | $ | 359,031 | | | $ | 993,727 | | | $ | 1,115,677 | | | $ | 382,040 | | | $ | 318,810 | | | $ | 1,100,606 | | | $ | 993,727 | |
| Distribution and services | | | 222,464 | | | | 75,677 | | | | 512,580 | | | | 219,346 | | | | 322,805 | | | | 222,464 | | | | 1,148,598 | | | | 512,580 | |
| | | $ | 541,274 | | | $ | 434,708 | | | $ | 1,506,307 | | | $ | 1,335,023 | | | $ | 704,845 | | | $ | 541,274 | | | $ | 2,249,204 | | | $ | 1,506,307 | |
| Segment profit (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Marine transportation | | $ | 36,042 | | | $ | 55,460 | | | $ | 107,062 | | | $ | 197,981 | | | $ | 48,517 | | | $ | 35,649 | | | $ | 102,925 | | | $ | 106,992 | |
| Distribution and services | | | 21,974 | | | | 4,634 | | | | 52,063 | | | | 1,860 | | | | 23,914 | | | | 21,947 | | | | 101,069 | | | | 51,983 | |
| Other | | | (10,155 | ) | | | (8,535 | ) | | | (27,251 | ) | | | (24,465 | ) | | | (15,365 | ) | | | (9,735 | ) | | | (59,543 | ) | | | (27,101 | ) |
| | | $ | 47,861 | | | $ | 51,559 | | | $ | 131,874 | | | $ | 175,376 | | | $ | 57,066 | | | $ | 47,861 | | | $ | 144,451 | | | $ | 131,874 | |
| | | September 30, 2017 | | | December 31, 2016 | | | September 30, 2018 | | | December 31, 2017 | |
| Total assets: | | | | | | | | | | | | |
| Marine transportation | | $ | 3,589,535 | | | $ | 3,613,951 | | | $ | 4,191,514 | | | $ | 3,485,099 | |
| Distribution and services | | | 1,559,937 | | | | 623,268 | | | | 1,601,407 | | | | 1,567,085 | |
| Other | | | 50,943 | | | | 52,676 | | | | 61,411 | | | | 75,243 | |
| | | $ | 5,200,415 | | | $ | 4,289,895 | | | $ | 5,854,332 | | | $ | 5,127,427 | |
The following table presents the details of “Other” segment loss for the three months and nine months ended September 30, 20172018 and 20162017 (in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| General corporate expenses | | $ | (4,495 | ) | | $ | (3,786 | ) | | $ | (12,512 | ) | | $ | (11,485 | ) | | $ | (4,492 | ) | | $ | (4,508 | ) | | $ | (31,822 | ) | | $ | (12,551 | ) |
| Gain (loss) on disposition of assets | | | (159 | ) | | | (122 | ) | | | (199 | ) | | | 39 | | | | 18 | | | | (159 | ) | | | 2,358 | | | | (199 | ) |
| Interest expense | | | (5,388 | ) | | | (4,507 | ) | | | (14,310 | ) | | | (13,213 | ) | | | (12,345 | ) | | | (5,388 | ) | | | (34,665 | ) | | | (14,310 | ) |
| Other income (expense) | | | (113 | ) | | | (120 | ) | | | (230 | ) | | | 194 | | | | 1,454 | | | | 320 | | | | 4,586 | | | | (41 | ) |
| | | $ | (10,155 | ) | | $ | (8,535 | ) | | $ | (27,251 | ) | | $ | (24,465 | ) | | $ | (15,365 | ) | | $ | (9,735 | ) | | $ | (59,543 | ) | | $ | (27,101 | ) |
General corporate expenses for the nine months ended September 30, 2018 include $18,057,000 of one-time non-deductible expense related to the retirement of the Company’s executive Chairman of the Board of Directors, effective April 30, 2018. He will continue to serve as Chairman of the Board in a non-executive role.
The following table presents the details of “Other” total assets as of September 30, 20172018 and December 31, 20162017 (in thousands):
| | | September 30, 2017 | | | December 31, 2016 | | | September 30, 2018 | | | December 31, 2017 | |
| General corporate assets | | $ | 49,092 | | | $ | 50,054 | | | $ | 59,229 | | | $ | 73,353 | |
| Investment in affiliates | | | 1,851 | | | | 2,622 | | | | 2,182 | | | | 1,890 | |
| | | $ | 50,943 | | | $ | 52,676 | | | $ | 61,411 | | | $ | 75,243 | |
Earnings before taxes on income and details of the provision for taxes on income for the three months and nine months ended September 30, 20172018 and 20162017 were as follows (in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| Earnings before taxes on income – United States | | $ | 47,861 | | | $ | 51,559 | | | $ | 131,874 | | | $ | 175,376 | | |
| Earnings (loss) before taxes on income: | | | | | | | | | | | | | |
| United States | | | $ | 57,980 | | | $ | 47,861 | | | $ | 147,506 | | | $ | 131,874 | |
| Foreign | | | | (914 | ) | | | — | | | | (3,055 | ) | | | — | |
| | | | $ | 57,066 | | | $ | 47,861 | | | $ | 144,451 | | | $ | 131,874 | |
| Provision for taxes on income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current | | $ | 3,617 | | | $ | 1,190 | | | $ | 13,605 | | | $ | 14,281 | | | $ | — | | | $ | 3,617 | | | $ | — | | | $ | 13,605 | |
| Deferred | | | 14,132 | | | | 16,582 | | | | 32,783 | | | | 46,264 | | | | 13,457 | | | | 14,132 | | | | 36,350 | | | | 32,783 | |
| State and local | | | 1,323 | | | | 1,434 | | | | 3,080 | | | | 4,885 | | |
| State and local: | | | | | | | | | | | | | | | | | |
| Current | | | | 1,559 | | | | 1,323 | | | | 3,965 | | | | 3,080 | |
| Deferred | | | | — | | | | — | | | | 488 | | | | — | |
| Foreign - current | | | | 100 | | | | — | | | | 239 | | | | — | |
| | | $ | 19,072 | | | $ | 19,206 | | | $ | 49,468 | | | $ | 65,430 | | | $ | 15,116 | | | $ | 19,072 | | | $ | 41,042 | | | $ | 49,468 | |
ASU 2016-09 requires that excess tax benefits and tax deficiencies related to share-based compensation be recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. This requirement was applied on a prospective basis to the tax effects of exercised or vested stock awards occurring on or after January 1, 2017. This resulted in an increase in the provision for taxes on income of $1,060,000 for the three months ended September 30, 2017 and a decrease of $178,000 for the nine months ended September 30, 2017.
(10)(12) | EARNINGS PER SHARE |
The following table presents the components of basic and diluted earnings per share for the three months and nine months ended September 30, 20172018 and 20162017 (in thousands, except per share amounts):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| Net earnings attributable to Kirby | | $ | 28,607 | | | $ | 32,010 | | | $ | 81,868 | | | $ | 109,051 | | | $ | 41,816 | | | $ | 28,607 | | | $ | 102,889 | | | $ | 81,868 | |
| Undistributed earnings allocated to restricted shares | | | (213 | ) | | | (239 | ) | | | (599 | ) | | | (766 | ) | | | (166 | ) | | | (213 | ) | | | (438 | ) | | | (599 | ) |
| Income available to Kirby common stockholders - basic | | | 28,394 | | | | 31,771 | | | | 81,269 | | | | 108,285 | | | | 41,650 | | | | 28,394 | | | | 102,451 | | | | 81,269 | |
| Undistributed earnings allocated to restricted shares | | | 213 | | | | 239 | | | | 599 | | | | 766 | | | | 166 | | | | 213 | | | | 438 | | | | 599 | |
| Undistributed earnings reallocated to restricted shares | | | (213 | ) | | | (238 | ) | | | (599 | ) | | | (765 | ) | | | (165 | ) | | | (213 | ) | | | (437 | ) | | | (599 | ) |
| Income available to Kirby common stockholders - diluted | | $ | 28,394 | | | $ | 31,772 | | | $ | 81,269 | | | $ | 108,286 | | | $ | 41,651 | | | $ | 28,394 | | | $ | 102,452 | | | $ | 81,269 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average common stock issued and outstanding | | | 55,177 | | | | 53,856 | | | | 54,364 | | | | 53,827 | | | | 59,875 | | | | 55,177 | | | | 59,782 | | | | 54,364 | |
| Weighted average unvested restricted stock | | | (412 | ) | | | (401 | ) | | | (398 | ) | | | (378 | ) | | | (237 | ) | | | (412 | ) | | | (255 | ) | | | (398 | ) |
| Weighted average common stock outstanding - basic | | | 54,765 | | | | 53,455 | | | | 53,966 | | | | 53,449 | | | | 59,638 | | | | 54,765 | | | | 59,527 | | | | 53,966 | |
| Dilutive effect of stock options | | | 38 | | | | 46 | | | | 55 | | | | 54 | | |
| Dilutive effect of stock options and restricted stock units | | | | 146 | | | | 38 | | | | 141 | | | | 55 | |
| Weighted average common stock outstanding - diluted | | | 54,803 | | | | 53,501 | | | | 54,021 | | | | 53,503 | | | | 59,784 | | | | 54,803 | | | | 59,668 | | | | 54,021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings per share attributable to Kirby common stockholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.52 | | | $ | 0.59 | | | $ | 1.51 | | | $ | 2.03 | | | $ | 0.70 | | | $ | 0.52 | | | $ | 1.72 | | | $ | 1.51 | |
| Diluted | | $ | 0.52 | | | $ | 0.59 | | | $ | 1.50 | | | $ | 2.02 | | | $ | 0.70 | | | $ | 0.52 | | | $ | 1.72 | | | $ | 1.50 | |
Certain outstanding options to purchase approximately 548,000189,000 and 520,000548,000 shares of common stock were excluded in the computation of diluted earnings per share as of September 30, 20172018 and 2016,2017, respectively, as such stock options would have been antidilutive.
The Company sponsors a defined benefit plan for its inland vessel personnel and shore based tankermen. The plan benefits are based on an employee’s years of service and compensation. The plan assets consist primarily of equity and fixed income securities.
On April 12, 2017, the Company amended its pension plan to cease all benefit accruals for periods after May 31, 2017 for certain participants. Participants grandfathered and not impacted were those, as of the close of business on May 31, 2017, who either (a) had completed 15 years of pension service or (b) had attained age 50 and completed 10 years of pension service. Participants non-grandfathered are eligible to receive discretionary 401(k) plan contributions. The Company did not incur any one-time charges related to this amendment but the pension plan’s projected benefit obligation decreased by $33,433,000.
The Company’s pension plan funding strategy is to make annual contributions in amounts equal to or greater than amounts necessary to meet minimum government funding requirements. The plan’s benefit obligations are based on a variety of demographic and economic assumptions, and the pension plan assets’ returns are subject to various risks, including market and interest rate risk, making an accurate prediction of the pension plan contribution difficult. Based on current pension plan assets and market conditions, the Company does not expect to make a contribution to its pension plan during 2017.2018.
On February 14, 2018, with the acquisition of Higman, the Company assumed Higman’s pension plan for its inland vessel personnel and office staff. On March 27, 2018, the Company amended the Higman pension plan to close it to all new entrants and cease all benefit accruals for periods after May 15, 2018 for all participants. The Company did not incur any one-time charges related to this amendment but the Higman pension plan’s projected benefit obligation decreased by $3,692,000. The Company made a pension contribution to the Higman plan of $6,717,000 in March 2018 to complete all required funding for the 2016 and 2017 years and make its 2018 first quarter contribution. The Company expects to make additional contributions to the Higman pension plan of approximately $1,385,000 in the fourth quarter of 2018 for the 2018 year.
The Company sponsors an unfunded defined benefit health care plan that provides limited postretirement medical benefits to employees who meet minimum age and service requirements, and to eligible dependents. The plan limits cost increases in the Company’s contribution to 4% per year. The plan is contributory, with retiree contributions adjusted annually. The plan eliminated coverage for future retirees as of December 31, 2011. The Company also has an unfunded defined benefit supplemental executive retirement plan (“SERP”) that was assumed in an acquisition in 1999. That plan ceased to accrue additional benefits effective January 1, 2000.
The components of net periodic benefit cost for the Company’s defined benefit plans for the three months and nine months ended September 30, 20172018 and 20162017 were as follows (in thousands):
| | | Pension Benefits | | |
| | | Pension Plan | | | SERP | | | Pension Benefits | |
| | | Three months ended September 30, | | | Three months ended September 30, | | | Pension Plan | | | SERP | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | Three months ended September 30, | | | Three months ended September 30, | |
| Components of net periodic benefit cost: | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| Service cost | | $ | 1,742 | | | $ | 3,351 | | | $ | — | | | $ | — | | | $ | 1,722 | | | $ | 1,742 | | | $ | — | | | $ | — | |
| Interest cost | | | 3,320 | | | | 3,531 | | | | 14 | | | | 16 | | | | 3,939 | | | | 3,320 | | | | 12 | | | | 14 | |
| Expected return on plan assets | | | (4,595 | ) | | | (4,202 | ) | | | — | | | | — | | | | (5,696 | ) | | | (4,595 | ) | | | — | | | | — | |
| Amortization of actuarial loss | | | 981 | | | | 1,372 | | | | 7 | | | | 7 | | | | 723 | | | | 981 | | | | 6 | | | | 7 | |
| Net periodic benefit cost | | $ | 1,448 | | | $ | 4,052 | | | $ | 21 | | | $ | 23 | | | $ | 688 | | | $ | 1,448 | | | $ | 18 | | | $ | 21 | |
| | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | |
| | | Pension Plan | | | SERP | | | Pension Benefits | |
| | | Nine months ended September 30, | | | Nine months ended September 30, | | | Pension Plan | | | SERP | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | Nine months ended September 30, | | | Nine months ended September 30, | |
| Components of net periodic benefit cost: | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| Service cost | | $ | 8,934 | | | $ | 10,053 | | | $ | — | | | $ | — | | | $ | 5,816 | | | $ | 8,934 | | | $ | — | | | $ | — | |
| Interest cost | | | 10,409 | | | | 10,594 | | | | 43 | | | | 49 | | | | 11,544 | | | | 10,409 | | | | 36 | | | | 43 | |
| Expected return on plan assets | | | (13,600 | ) | | | (12,606 | ) | | | — | | | | — | | | | (16,712 | ) | | | (13,600 | ) | | | — | | | | — | |
| Amortization of actuarial loss | | | 3,419 | | | | 4,115 | | | | 21 | | | | 20 | | | | 2,168 | | | | 3,419 | | | | 18 | | | | 21 | |
| Net periodic benefit cost | | $ | 9,162 | | | $ | 12,156 | | | $ | 64 | | | $ | 69 | | | $ | 2,816 | | | $ | 9,162 | | | $ | 54 | | | $ | 64 | |
The components of net periodic benefit cost for the Company’s postretirement benefit plan for the three months and nine months ended September 30, 20172018 and 20162017 were as follows (in thousands):
| | | Other Postretirement Benefits | | | Other Postretirement Benefits | | | Other Postretirement Benefits | | | Other Postretirement Benefits | |
| | | Postretirement Welfare Plan | | | Postretirement Welfare Plan | | | Postretirement Welfare Plan | | | Postretirement Welfare Plan | |
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| Components of net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Interest cost | | | 6 | | | | 7 | | | | 20 | | | | 22 | | | | 6 | | | | 6 | | | | 18 | | | | 20 | |
| Amortization of actuarial gain | | | (166 | ) | | | (186 | ) | | | (501 | ) | | | (560 | ) | | | (149 | ) | | | (166 | ) | | | (447 | ) | | | (501 | ) |
| Net periodic benefit cost | | $ | (160 | ) | | $ | (179 | ) | | $ | (481 | ) | | $ | (538 | ) | | $ | (143 | ) | | $ | (160 | ) | | $ | (429 | ) | | $ | (481 | ) |
On October 13, 2016, the tug Nathan E. Stewart and barge DBL 55, an articulated tank barge and tugboat unit (“ATB”), ran aground at the entrance to Seaforth Channel on Atholone Island, British Columbia. The grounding resulted in a breach of a portion of the Nathan E. Stewart’s fuel tanks causing a discharge of diesel fuel into the water. The United States Coast Guard (“USCG”)USCG and the National Transportation Safety Board (“NTSB”) designated the Company as a party of interest in their investigation as to the cause of the incident. The Canadian authorities including Transport Canada and the Canadian Transportation Safety Board are also investigatinginvestigated the cause of the incident. TheOn October 10, 2018, the Heiltsuk First Nation filed a civil action against a subsidiary of the Company, is subject to claims from third parties as well as the provincialmaster and federalpilot of the tug, the vessels and the Canadian government seeking unquantified damages as a result of the incident. On the same date, the Canadian government filed charges against the subsidiary and the vessels for violations of the Canadian Fisheries Act, the Migratory Birds Convention Act, the Pilotage Act and the Shipping Act of 2001. The Company is preparing its responses and is unable to estimate the potential exposure in either proceeding. The Company has various insurance policies covering liabilities including pollution, property, marine and general liability and believes that it has satisfactory insurance coverage for the cost of cleanup and salvage operations as well as other potential liabilities arising from the incident. The Company believes it has accrued adequate reserves for the incident and does not expect the incident to have a material adverse effect on its business or financial condition.
On March 22, 2014, two tank barges and a towboat (the M/V Miss Susan), owned by Kirby Inland Marine, LP, a wholly owned subsidiary of the Company, were involved in a collision with the M/S Summer Wind on the Houston Ship Channel near Texas City, Texas. The lead tank barge was damaged in the collision resulting in a discharge of intermediate fuel oil from one of its cargo tanks. The USCG and the NTSB named the Company and the Captain of the M/V Miss Susan, as well as the owner and the pilot of the M/S Summer Wind, as parties of interest in their investigation as to the cause of the incident. Sea Galaxy Ltd is the owner of the M/S Summer Wind. The Company is participating in the natural resource damage assessment and restoration process with federal and state government natural resource trustees. The Company believes it has adequate insurance coverage for pollution, marine and other potential liabilities arising from the incident. The Company believes it has accrued adequate reserves for the incident and does not expect the incident to have a material adverse effect on its business or financial condition.
TheIn addition, the Company is also involved in various legal and other proceedings which are incidental to the conduct of its business, none of which in the opinion of management will have a material effect on the Company’s businessfinancial condition, results of operations or financial condition.cash flows. Management believes that it has recorded adequate reserves and believes that it has adequate insurance coverage or has meritorious defenses for these other claims and contingencies.
The Company has issued guaranties or obtained standby letters of credit and performance bonds supporting performance by the Company and its subsidiaries of contractual or contingent legal obligations of the Company and its subsidiaries incurred in the ordinary course of business. The aggregate notional value of these instruments is $30,466,000$23,719,000 at September 30, 2017,2018, including $11,829,000$8,857,000 in letters of credit and $18,637,000$14,862,000 in performance bonds. All of these instruments have an expiration date within fourthree years. The Company does not believe demand for payment under these instruments is likely and expects no material cash outlays to occur in connection withregarding these instruments.
On October 20, 2017, San Jac Marine, LLC (“San Jac”), a subsidiary of the Company, purchased certain assets of Sneed Shipbuilding, Inc. for $14,905,000 in cash including its Channelview, Texas shipyard. San Jac is a builder of marine vessels for both inland and offshore applications as well providing repair and maintenance services. The Company intends to build towboats at the shipyard and use the facilities for routine maintenance. The Company has not completed the final purchase price allocation at this time.
The Company continues to be subject to the risk factors previously disclosed in its “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as well as the following additional risk factor:
The Company may be unable to make attractive acquisitions or successfully integrate acquired businesses, and any inability to do so may disrupt the Company’s business and hinder its ability to grow. The Company has made asset and business acquisitions in the past and may continue to make acquisitions of assets or businesses in the future that complement or expand the Company’s current business. The Company may not be able to identify attractive acquisition opportunities. Even if attractive acquisition opportunities are identified, the Company may not be able to complete the acquisition or do so on commercially acceptable terms. The success of any completed acquisition depends on the Company’s ability to integrate the acquired assets or business effectively into the Company’s existing operations. The process of integrating acquired assets or businesses may involve difficulties that require a disproportionate amount of the Company’s managerial and financial resources to resolve. The value of acquired assets or businesses may be negatively impacted by a variety of circumstances unknown to the Company prior to the acquisition. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. No assurance can be given that the Company will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. The Company’s failure to achieve consolidation savings, to integrate successfully the acquired businesses and assets into the Company’s existing operations, or to minimize any unforeseen operational difficulties could have a material adverse effect on the Company’s business, financial condition, and results of operations. In addition, agreements governing the Company’s indebtedness from time to time may impose certain limitations on the Company’s ability to undertake acquisitions or make investments or may limit the Company’s ability to incur certain indebtedness and liens, which could limit the Company’s ability to make acquisitions.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Statements contained in this Form 10-Q that are not historical facts, including, but not limited to, any projections contained herein, are forward-looking statements and involve a number of risks and uncertainties. Such statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “project”“estimate” or “continue,” or the negative thereof or other variations thereon or comparable terminology. The actual results of the future events described in such forward-looking statements in this Form 10-Q could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: adverse economic conditions, industry competition and other competitive factors, adverse weather conditions such as high water, low water, tropical storms, hurricanes, tsunamis, fog and ice, and tornadoes, marine accidents, lock delays, fuel costs, interest rates, construction of new equipment by competitors, government and environmental laws and regulations, and the timing, magnitude and number of acquisitions made by the Company. For a more detailed discussion of factors that could cause actual results to differ from those presented in forward-looking statements, see Item 1A-Risk Factors found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and Item 1A - Risk Factors in this report.2017. Forward-looking statements are based on currently available information and the Company assumes no obligation to update any such statements.
For purposes of the Management’s Discussion, all net earnings per share attributable to Kirby common stockholders are “diluted earnings per share.” The weighted average number of common shares applicable to diluted earnings per share for the three months and nine months ended September 30, 20172018 and 20162017 were as follows (in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | | | | | | |
| Weighted average number of common stock - diluted | | | 54,803 | | | | 53,501 | | | | 54,021 | | | | 53,503 | |
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| Weighted average number of common stock - diluted | | | 59,784 | | | | 54,803 | | | | 59,668 | | | | 54,021 | |
The increase in the weighted average number of common shares for the 20172018 third quarter and first nine months compared with the 20162017 third quarter and first nine months primarily reflected the issuance of 5,696,259 shares of Company common stock associated with the acquisition of Stewart & Stevenson LLC (“S&S acquisition&S”) on September 13, 2017, and the issuance of restricted stock and the exercise of stock options.
Overview
The Company is the nation’s largest domestic tank barge operator, transporting bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, coastwise along all three United States coasts, and in Alaska and Hawaii. The Company transports petrochemicals, black oil, refined petroleum products and agricultural chemicals by tank barge. As of September 30, 2017,2018, the Company operated a fleet of 848981 inland tank barges with 17.421.6 million barrels of capacity, and operated an average of 215282 inland towboats during the 2017 third quarter.towboats. The Company’s coastal fleet consisted of 6754 tank barges with 6.25.1 million barrels of capacity and 7050 coastal tugboats. The Company also owns and operates five offshore dry-bulk cargo barges, and five offshore tugboats and one docking tugboat transporting dry-bulk cargoescommodities in United States coastal trade. Through its distribution and services segment, the Company provides after-market service and parts for engines, transmissions, reduction gears, and related equipment used in oilfield services, marine, mining, power generation, on-highway, and other industrial applications. The Company also rents equipment including generators, fork lifts, pumps and compressors for use in a variety of industrial markets, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, for the land-based oilfield service and oil and gas operator and producer markets.
For the 2018 third quarter, net earnings attributable to Kirby were $41,816,000, or $0.70 per share, on revenues of $704,845,000, compared with 2017 third quarter net earnings attributable to Kirby wereof $28,607,000, or $0.52 per share, on revenues of $541,274,000, compared with 2016 third quarter$541,274,000. For the 2018 first nine months, net earnings attributable to Kirby of $32,010,000,were $102,889,000, or $0.59$1.72 per share, on revenues of $434,708,000. For the$2,249,204,000, compared with 2017 first nine months net earnings attributable to Kirby wereof $81,868,000, or $1.50 per share, on revenues of $1,506,307,000, compared with 2016$1,506,307,000. The 2018 third quarter and first nine months net earnings attributable to Kirbyreflected the integration of $109,051,000,Targa’s pressure barge fleet, acquired on May 10, 2018, and the integration of Higman, acquired on February 14, 2018. The 2018 second quarter included a one-time non-deductible expense of $18,057,000, or $2.02$0.30 per share, related to the retirement of Joseph H. Pyne as executive Chairman of the Board of Directors, effective April 30, 2018. The 2018 first quarter included $3,261,000 before taxes, or $0.04 per share, of one-time transaction costs associated with the Higman acquisition, as well as $2,912,000 before taxes, or $0.04 per share, of severance and retirement expenses, primarily related to cost reduction initiatives in the coastal marine transportation market and the integration of Higman. In addition, the 2018 first quarter included $3,938,000 before taxes, or $0.05 per share, of non-cash expenses related to an amendment to the employee stock award plan. The result of the amendment is shorter expense accrual periods on revenuesstock options and RSUs granted after February 19, 2018 to employees who are nearing retirement and meet certain years of $1,335,023,000.service and age requirements. The 2017 third quarter and first nine months were negatively impacted by pre-tax expenses related to the acquisition of S&S of $764,000, or $0.01 per share, and $1,471,000, or $0.02 per share, respectively.
Marine Transportation
For the 20172018 third quarter and first nine months, the Company’s marine transportation segment generated 59%54% and 66%49%, respectively, of the Company’s revenue. The segment’s customers include many of the major petrochemical and refining companies that operate in the United States. Products transported include intermediate materials used to produce many of the end products used widely by businesses and consumers — plastics, fiber, paints, detergents, oil additives and paper, among others, as well as residual fuel oil, ship bunkers, asphalt, gasoline, diesel fuel, heating oil, crude oil, natural gas condensate and agricultural chemicals. Consequently, the Company’s marine transportation business is directly affected by the volumes produced by the Company’s petroleum, petrochemical and refining customer base.
The Company’s marine transportation segment’s revenues for the 20172018 third quarter and first nine months decreasedincreased 20% and 11%, respectively, when compared with the 2016 third quarter and first nine months. The decrease in revenues was primarily due to the industry-wide oversupply of tank barges in both the inland and coastal markets, resulting in lower inland marine transportation term and spot contract pricing, lower coastal marine transportation spot contract pricing and lower coastal equipment utilization. In addition, a continued increase in the number of coastal vessels operating in the spot market led to increased idle time and decreased revenues, partially offset by an increase in the average cost of marine diesel fuel which is largely passed through to the customer and the addition of the nine specialty pressure tank barges and four 30,000 barrel tank barges purchased in July 2017.
The segment’s operating income for the 2017 third quarter and first nine months decreased 35% and 46%, respectively, compared with the 2016 third quarter and first nine months.revenues. The decreases in operating incomeincreases were primarily due to the addition of the Higman inland tank barges acquired on February 14, 2018 and the Targa pressure barges acquired on May 10, 2018, and improved barge utilization and spot contract pricing in the inland market. Partially offsetting these increases were lower inland term and spot contract pricing lower coastal spot contract pricing, lower coastal equipment utilization and a continued increase in coastal equipment operating in the spot market which adds increased idle time and voyage costs, partially offset by savings in the coastal market, from the release of chartered tugboats, idling owned barges and tugboats and reducing headcount accordingly, and by a reductionweaker average term contract pricing in the average numberinland market in the 2018 first half, poor seasonal weather conditions in the first four months of inland towboats operated.
2018, and fewer coastal tank barges available with the impairment and retirement of 12 tank barges in the 2017 fourth quarter. The segment’s operating income for the 2018 third quarter increased 36% compared with the 2017 third quarter and nine months revenue and operating income decreases were also due to the lossacquisitions of revenueHigman and additional operating expensesTarga’s pressure barge fleet, improved term and spot contract pricing in the inland market, and coastal marine transportation markets associated with Hurricanes Harvey and Irma. Initial net lost revenues and costs associated withimproved barge utilization in the hurricanes were approximately $0.07 per shareinland market. The segment’s operating income decreased 4% for the third quarter. However, as the third quarter concluded, recoveries from marine customers for delays, pent-up demand for liquid barge movements as the Gulf Coast petrochemical and refinery complex returned to normal operations and a stronger pricing environment for customers’ products partially mitigated the negative impact of the hurricanes by approximately $0.04 per share. The 20162018 first nine months marine transportation operating income included $3,792,000compared with the 2017 first nine months primarily due to lower coastal term and spot contract pricing, weaker average inland term contract pricing in the 2018 first half, and poor seasonal weather conditions in the first four months of 2018. The 2018 first nine months were also impacted by the Higman transaction costs, severance chargesand retirement costs, and the amendment to the employee stock award plan; all of which were incurred in the 20162018 first quarter.quarter and are discussed above. For the 20172018 and 20162017 third quarters the inland tank barge fleet contributed 72% and 66%, respectively, and the coastal fleet contributed 28% and 34%, respectively, of marine transportation revenues. For the 2017 and 2016 first nine months, the inland tank barge fleet contributed 71%76% and 67%69%, respectively, and the coastal fleet contributed 29%24% and 33%31%, respectively, of marine transportation revenues.
OperatingTank barge utilization levels of the Company’s inland marine transportation markets were in the low to mid-90% range during the 2018 third quarter compared with the high 80% to low 90% range during the 2018 second quarter and mid-80% to mid-90% range during the 2017 third quarter. Increasing volumes from petrochemical and black oil customers, lock infrastructure projects in Louisiana as well as on the Ohio River, and refinery turnarounds contributed to increased utilization during the 2018 third quarter compared to the 2018 second quarter. Lower utilization levels in the 2017 third quarter were due to deteriorated operating conditions for the Company’s inland marine transportation markets during the 2017 third quarter deteriorated significantly after Hurricane Harvey made land-fall on the Gulf Coast at the end of August.August 2017. Unrelated and coinciding infrastructure repairs on the upper Mississippi River further decreased operating efficiency in September. The effect was an increase in inland tank barge utilization levels after Hurricane Harvey from the mid-80% to the mid-90% range compared to the mid-80% to high 80% range during the 2017 second quarter, the high 80% to low 90% range during the 2017 first quarter and the low-to-mid 80% range for the 2016 third quarter. For the 2017 third quarter and first nine months, demand for barges moving petrochemicals and black oil was stable, while demand for refined petroleum products was lower compared to demand for the comparable 2016 periods.September 2017.
Coastal tank barge utilization levels declined towere in the 80% range during the 2018 second and third quarters compared with the high 70% range during the 2018 first quarter and low 60% to mid-60% range from the high 60% to mid-70% range during the 2017 second quarter,third quarter. The improvement in utilization in 2018 primarily reflected the mid-70% to low 80% rangeimpairment and retirement of 12 out-of-service coastal barges during the 2017 first quarter and the low-to-mid 80% range in the 2016 thirdfourth quarter. Utilization in the coastal marine fleet continued to be impacted by the industry-wide oversupply of tank barges. Demand forbarges in the transportation of petrochemicals was relatively stable duringcoastal industry.
During the 20172018 third quarter and first nine months, compared to demand for the comparable 2016 periods. Demand for black oil products was weaker in the 2017 third quarter compared to the 2017 firstapproximately 65% of marine transportation inland revenues were under term contracts and second quarters and the 2016 third quarter. Demand for the transportation of refined petroleum products and crude oil was lower in the 2017 third quarter and first nine months compared to demand in the same 2016 periods, primarily due to the oversupply of barge capacity.
During35% were spot contract revenues. For the 2017 third quarter and first nine months, approximately 75% of marine transportation inland revenues were under term contracts and 25% were spot contract revenues. For the 2016 third quarter and first nine months, approximately 80% of inland revenues were under term contracts and 20% were spot contract revenues. Inland time charters during the 20172018 third quarter and first nine months represented 48%58% and 59%, respectively, of the revenues under term contracts compared with 52% and 53%48% in the 20162017 third quarter and first nine months, respectively.months. Rates on inland term contracts renewed in the 2018 first quarter decreased in the 4% to 6% average range compared with term contracts renewed in the first quarter of 2017. Rates on inland term contracts renewed in the 2018 second quarter increased in the 1% to 3% average range compared with term contracts renewed in the second quarter of 2017. In the 2018 third quarter, rates on inland term contracts renewed increased in the 3% to 5% average range compared with term contracts renewed in the third quarter of 2017. Spot contract rates increased in the 3% to 5% range in the 2018 third quarter compared to the 2018 second quarter and increased in the 20% to 25% range compared to the 2017 third quarter. Effective January 1, 2018, annual escalators for labor and the producer price index on a number of inland multi-year contracts resulted in rate increases on those contracts of approximately 1.0%, excluding fuel.
During the 20172018 and 20162017 third quarters and first nine months, approximately 80% of the coastal revenues were under term contracts and 20% were spot contract revenues. Coastal time charters represented approximately 85% of coastal revenues under term contracts during the 2018 and 2017 third quarterquarters and first nine monthsmonths. Spot contract pricing for the 2018 third quarter was stable compared with 90% duringpricing for the 20162018 first half. Term contract pricing for the 2018 third quarter andwas modestly higher compared to the 2018 first nine months.
Rates on inland term contracts renewed inhalf. However, compared with the 2017 third quarter and first nine months, continued to deteriorate due to excess industry capacity, decreasingboth term and spot contract pricing declined in the 4%10% to 8% average15% range, compared with term contracts renewed in the third quarter and first nine months of 2016. Spot contract rates, which include the cost of fuel, were relatively flat when compared with the 2017 first and second quarters, but below term contract rates. Effective January 1, 2017, annual escalators for labor and the producer price indexcontingent on a number of inland multi-year contracts resulted in rate increases on those contracts of approximately 0.6%, excluding fuel.
There were no coastal term contracts renewed in the 2017 third quarter as customers elected to source their needs in the spot market. Rates on coastal term contracts renewed in the 2017 first six months were down slightly compared to term contracts renewed in the 2016 comparable periods, although most contracts failed to renew and customers elected to source their needs in the spot market. Spot contract rates, which include the cost of fuel, remained meaningfully below term contract rates during the first nine months of 2017, the degree to which varies based on geography,various factors including geographic location, vessel capacity, vessel type and product service.serviced.
The marine transportation operating margin was 11.3%12.7% for the 2018 third quarter compared with 11.2% for the 2017 third quarter compared with 15.4%and 9.4% for the 2016 third quarter and2018 first nine months compared with 10.8% for the 2017 first nine months compared with 17.7% for the 2016 first nine months.
Distribution and Services
For the 20172018 third quarter and first nine months, the distribution and services segment generated 41%46% and 34%51%, respectively, of the Company’s revenue. For the 20172018 third quarter and first nine months, 46%40% and 44%37% of the distribution and services segment revenue was generated from overhauls and service, 33%39% and 36%34% from direct parts sales and 21% and 20%29% from manufacturing, respectively. The results of the distribution and services segment are largely influenced by the economic cycles of the land-based oilfield service and oil and gas operator and producer markets, marine, mining, power generation, on-highway and other industrial markets.
Distribution and services revenues for the 20172018 third quarter and first nine months increased 194%45% and 134%124%, respectively, when compared with the third quarter and first nine months of 2016.2017. Operating income for the 20172018 third quarter and first nine months was $21,974,000increased 9% and $52,063,000,94%, respectively, when compared with operating income in the 2016 third quarter and first nine months of $4,634,000 and $1,860,000, respectively.2017. The higher revenues and operating income were primarily attributable to the acquisition of S&S, completed on September 13, 2017, as well as increased demand in the 2017oil and gas market for the manufacturing of oilfield service equipment, including new pressure pumping units, the sale and distribution of engines and related parts, and improving market conditions in the commercial marine diesel engine repair business, partially offset by lower demand in the 2018 third quarter for new and overhauled transmissions and related parts and remanufactured pressure pumping units from some key oilfield customers. For the 2018 third quarter and first nine months, compared to the 2016 third quarteroil and first nine months were primarily attributable togas market contributed 62% and 68%, respectively, of the increaseddistribution and services revenues. However, the strong demand inchallenged the land-based marketCompany’s vendor supply chain throughout 2018, creating delays for the remanufacturedelivery of pressure pumping unitsnew engines, transmissions and transmission overhauls, an improvement inparts required for the manufacturingcompletion of both new and remanufactured oilfield service equipment, including pressure pumping units, and an increaseimpacted the recognition of revenue. In the commercial and industrial market, which contributed 38% and 32% of the distribution and services revenues for the 2018 third quarter and first nine months, respectively, the marine sector experienced higher service levels for medium-speed diesel engine overhauls and related parts sales throughout the 2018 first nine months. The power generation sector saw increased demand from commercial customers for specialty rental units and back-up power systems in the demand for2018 second and third quarters in anticipation of and as a result of summer storms after the sale and distributionseasonal decline in the rental of engines, transmissions and related parts. Thestand-by power generators in the 2018 first quarter. Demand in the nuclear power generation market was stable compared to the 2017 third quarter and first nine months higher revenues and operating income also reflected the S&S acquisition on September 13, 2017. S&S benefited from elevated demand for rental equipment and increased service work as a result of pent-up demand following Hurricanes Harvey, Irma and Maria, as well as healthy demand for service work, parts sales and the manufacturing of pressure pumping equipment. In the marine market, customers continued to defer major maintenance projects, particularly in the Midwest and on the East Coast, largely due to the weak inland and coastal tank barge markets and inland dry cargo barge market. In addition, continued weakness in the Gulf of Mexico oilfield services market negatively impacted the marine market. The power generation market was relatively stable with major generator set upgrades and parts sales for both domestic and international power generation customers. The distribution and services results for the 2016 first nine months included $1,436,000 of severance charges incurred in the 2016 first quarter in response to the reduced activity in both the land-based and marine markets.months.
The distribution and services segment operating margin for the 20172018 third quarter was 9.9%7.4% compared with 6.1%9.9% for the 20162017 third quarter. For the 20172018 first nine months, the operating margin was 10.2%8.8% compared with 0.8%10.1% for the first nine months of 2016.2017.
Cash Flow and Capital Expenditures
The Company continued to generate strong operating cash flow during the 2017 first nine months, with net cash provided by operating activities of $259,455,000 compared with $338,246,000 netNet cash provided by operating activities for the 20162018 first nine months. The 23% decreasemonths was $272,304,000 compared with $259,455,000 for the 2017 first nine months, a 5% increase, primarily fromdue to a $39,640,000$21,003,000 increase in net earnings, a $19,971,000 increase in depreciation and amortization expense, a $7,658,000 increase in unearned compensation expense, and a $4,055,000 increase in deferred income taxes, partially offset by a $38,115,000 net decrease in cash flows resulting from changes in operating assets and liabilities $27,540,000 of lowerfor the 2018 first nine months. The net earnings, and a $13,481,000 decrease in cash flows from the provision for deferred income taxes. Duringchange in operating assets and liabilities was primarily due to higher inventories, including work in progress, in the distribution and services oil and gas market during the 2018 first nine months, primarily to support the increased business activity levels, partially offset by a decrease in trade receivables due to a decrease in revenues recognized in the distribution and services oil and gas market in the 2018 third quarter. In addition, during the 2018 and 2017 first nine months, the Company generated cash of $27,806,000 and $29,743,000, respectively, from proceeds from the disposition of assets, compared to $15,136,000 for the first nine months of 2016. In the 2017 second quarter, the Company executed a sale leaseback transaction related to a constructed 4900 horsepower coastal tugboat. The Company received cash proceeds of $18,314,000 for the coastal tugboat and executed a ten year lease with the buyer. The Company also generated cash during the 2017$13,264,000 and 2016 first nine months of $2,076,000, and $321,000, respectively, from proceeds from the exercise of stock options.
For the 20172018 first nine months, cash generated and borrowings under the Company’s Revolving Credit Facilityrevolving credit facility were used for capital expenditures of $133,437,000,$231,752,000, including $8,449,000$19,111,000 for inland tank barge and towboat construction, $8,786,000 for progress payments on the construction of a 155,000 barrel coastal ATB placed in service in the 2017 third quarter, $15,404,000 for progress payments on the construction of two 4900 horsepower coastal tugboats, one completed in the 2017 second quarter and the second to be completed in the 2017 fourth quarter, $16,357,000$29,910,000 for progress payments on six 5000 horsepower coastal ATB tugboats, $698,000 in final costs$60,338,000 for the construction of a 35,000155,000 barrel coastal petrochemical tank barge, and $83,743,000ATB under construction purchased from a competitor that is scheduled to be delivered in the 2018 fourth quarter, $122,393,000 primarily for upgrading existing marine equipment and marine transportation and distribution and services facilities, and $451,219,000facilities. The Company also used $499,227,000 for acquisitions of businesses and marine equipment.
The Company’s debt-to-capitalization ratio increased to 26.4%30.2% at September 30, 20172018 from 23.1%24.2% at December 31, 2016,2017, primarily due to borrowings under the Company’s Revolving Credit Facility used2028 Notes to purchase Higman in the assets2018 first quarter and borrowings under the Company’s revolving credit facility for the acquisition of S&S, lessTarga’s pressure barge fleet and the purchase of the 155,000 barrel coastal ATB under construction in the 2018 second quarter, offset by the increase in total equity from net earnings attributable to Kirby for the 20172018 first nine months of $81,868,000, stock issued with a fair value of $366,554,000 in connection with$102,889,000 and the acquisition of the assets of S&S, exercise of stock options and the amortization of unearned equity compensation, partially offset by an $8,486,000 decrease in retained earnings due to the adoption of ASU 2016-09.compensation. As of September 30, 2017,2018, the Company had $524,410,000$406,948,000 outstanding under its Revolving Credit Facility, and $500,000,000 of senior notes outstanding and $500,000,000 of the 2028 Notes outstanding, offset by $3,641,000$7,525,000 in unamortized debt discount and issuance costs. In addition, as a result of the S&S acquisition, the Company assumed debt of $13,724,000 and, after making principal payments of $1,065,000, the Company had a balance of $12,659,000 outstanding as of September 30, 2017, of which $2,400,000 was classified as current portion of long-term debt.
During the 20172018 first nine months, the Company took delivery of fourone new inland tank barge with a capacity of approximately 29,000 barrels, acquired 161 inland tank barges with the Higman acquisition with a total capacity of approximately 4,714,000 barrels, acquired 16 pressure barges from Targa with a total capacity of approximately 258,000 barrels, acquired two inland tank barges with a total capacity of approximately 115,00035,000 barrels, acquired nine specialty pressuretook delivery of a new inland tank barges and four 30,000 barrel tank bargesbarge with a total capacity of 253,00026,000 barrels, which is being leased, and retired 4741 inland tank barges, reducing its capacity by approximately 913,000 barrels, brought one inland tank barge back into service with a capacity of 20,000 barrels and temporarily chartered one inland tank barge with a total capacity of approximately 11,000736,000 barrels. The net result was a reductionan increase of 28140 inland tank barges and approximately 514,0004,326,000 barrels of capacity during the first nine months of 2017.2018.
The Company projects that capital expenditures for 20172018 will be in the $175,000,000$275,000,000 to $185,000,000$290,000,000 range. The 20172018 construction program will consist of fiveone 30,000 barrel inland tank barges with a total capacity of 144,000 barrels and progress payments on 16 inland towboats of which one was delivered in the 2017 third quarter and 15 will be delivered in 2018 and 2019,barge, progress payments on the construction of a 155,000 barrel coastal ATB15 inland towboats, five of which will be placed in service in 2018 and the 2017 third quarter,remaining ten in 2019 and 2020, progress payments on the construction of two 4900 horsepower coastal tugboats and six 5000 horsepower coastal ATB tugboats, two of which were placed in service in the 2018 third quarter, one of which will be placed in service in the 2018 fourth quarter and final coststhree in 2019, and total payments on the construction of a 35,000155,000 barrel coastal petrochemical tank barge.ATB under construction that is scheduled to be delivered in the 2018 fourth quarter. Based on current commitments, steel prices and projected delivery schedules, the Company’s 20172018 payments on the new inland tank bargesbarge and the towboats will be approximately $17,000,000, 2017 progress payments on the construction of the 155,000 barrel coastal ATB will be approximately $9,000,000, 2017 progress payments on the construction of the two 4900 horsepower coastal tugboats will be approximately $17,000,000,$30,000,000, 2018 progress payments on the construction of the six 5000 horsepower coastal ATB tugboats will be approximately $26,000,000,$35,000,000 and final coststotal payments on the construction of the 35,000155,000 barrel coastal petrochemical tank bargeATB will be approximately $1,000,000. The balance of approximately $105,000,000$65,000,000. Approximately $135,000,000 to $115,000,000$145,000,000 is primarily capital upgrades and improvements to existing marine equipment and marine transportationfacilities. The balance of $10,000,000 to $15,000,000 will be for rental fleet growth, new machinery and equipment, and facilities improvements in the distribution and services facilities.segment.
Outlook
Reduced crude oil volumes to be moved by tank barge due to a decline in oil prices, a decline in domestic drilling and additional pipelines,pipeline capacity, coupled with the large number of inland tank barges built during the last several years,2015 and 2016, and coastal tank barges built during 2016 and 2017, many of which were originally built for the movement of crude oil and natural gas condensate, have resulted in excess industry-wide tank barge capacity and lower equipment utilization for both the inland and coastal marine transportation markets. This extra capacity placed inland and coastal tank barge utilization and rates under pressure. As a
However, with continued industry-wide inland tank barge retirements, minimal new inland tank barge construction and higher customer demand, the result the inland market for the fourth quarter of 2017 will be impacted by the pricing declines experienced throughout 2016increased production from current facilities, plant expansions and the 2017 first nine months. The Company anticipatesopening of new facilities, inland utilization has improved and is anticipated to range frombe in the mid-80%low to mid-90% range for the fourth quarter of 2017. While supply2018. The 2018 fourth quarter inland utilization will also be helped by continued lock closures and demandseasonal weather impacts. With utilization in the inland tank barge industry is moving toward balance,market in the Company does not expect an improvementlow to mid-90% range in pricing this year. However, future inland tank barge demand for petrochemicalthe 2018 third quarter, the high 80% to low 90% range during the 2018 second quarter and refined petroleum products volumes from increased production from current facilities, plant expansions or the opening of new facilities should benefitmid-90% level during the inland marine transportation markets.
In the coastal marine transportation market, a decline in crude oil and natural gas condensate transportation volumes has increased available capacity and has resulted in some reluctance among certain customers to extend term contracts,2018 first quarter, which has led to an increase inimproved spot contract pricing during the number of coastal vessels operating in the spot market. In addition, the Company and the industry have added new coastal tank barge capacity during 2015 and 2016, with additional new capacity coming on-line in 2017 through 2019. While much of this new capacity is replacement capacity for older vessels anticipated to be retired, the Company maintains a cautious outlook as the industry absorbs the new capacity. While the Company does expect the supply of tank barges and capacity in the coastal industry fleet to eventually balance with demand, the Company does not anticipate that balance occurring in 2017 without an improvement in demand. As a result, throughout the 20172018 first nine months and improved term contract pricing during the 2018 second and third quarters, the Company released chartered tugboats, idled owned barges and tugboats and reduced headcount accordingly. The Company expects tank barge utilization for the coastal marketsanticipates term contracts to becontinue to renew higher in the low-to-mid 60% range for the2018 fourth quarter of 2017.quarter.
As of September 30, 2017,2018, the Company estimated there were approximately 3,8503,800 inland tank barges in the industry fleet, of which approximately 500400 were over 30 years old and approximately 250 of those over 40 years old. Given the age profile of the industry inland tank barge fleet, and current market conditions, the expectation is that many older tank barges will be removed from service during 2017.2018. The Company estimates that approximately 4065 tank barges were ordered during 20162017 and 2018 for delivery throughout 2017, five2018, three of which are for the Company, and many older tank barges, including an expected 5144 by the Company, will be retired, dependent on 20172018 market conditions. Historically, 75 to 150 older inland tank barges are retired from service each year industry-wide, with the extent of the retirements dependent on petrochemical and refinery production levels, and crude oil and natural gas condensate movements, both of which can have a direct effect on industry-wide tank barge utilization, as well as term and spot contract rates.
In the coastal marine transportation market, a decline in crude oil and natural gas condensate transportation volumes increased available capacity and resulted in some reluctance among certain customers to extend term contracts, which led to an increase in the number of coastal vessels operating in the spot market. In addition, the Company and the industry added new coastal tank barge capacity during 2015, 2016 and 2017. Throughout 2017, the Company released chartered tugboats, idled owned barges and tugboats and reduced headcount accordingly. With additional coastal industry tank barge capacity still under construction with deliveries scheduled for 2018 and 2019, and utilization rates in the mid-60% range, during the 2017 fourth quarter, the Company impaired and retired 12 out-of-service coastal tank barges and 21 inactive coastal tugboats. With its reduced coastal fleet, the Company expects coastal tank barge utilization to be in the 80% range for the 2018 fourth quarter, with a stabilized pricing environment. However, planned shipyards in the 2018 fourth quarter for a few large capacity vessels will negatively impact revenue and profit in the fourth quarter compared to the 2018 third quarter.
As of September 30, 2017,2018, the Company estimated there were approximately 295 tank barges operating in the 195,000 barrel or less coastal industry fleet, the sector of the market in which the Company operates, and approximately 3520 of those were over 30 years old. TheIn June 2018, the Company took delivery ofpurchased a new 155,000 barrel coastal ATB under construction from a competitor that is scheduled to be delivered to the Company in the 2017 third2018 fourth quarter. The Company is aware of ninethree announced coastal tank barge and tugboat units in the 195,000 barrel or less category under construction by competitors for delivery in the 20172018 fourth quarter 2018 and 2019.
InThe results of the land-based distribution and services market,segment are largely influenced by the Company is experiencingeconomic cycles of the land-based oilfield service and oil and gas operator and producer markets, marine, mining, power generation, on-highway and other industrial markets. During 2015 and 2016, lower crude oil prices resulted in a healthy rebounddecrease in the number of oil and gas wells being drilled. Oilfield service companies reduced their capital spending, resulting in decreased demand particularly withfor new parts and equipment, including pressure pumping unit remanufacturingunits, provided by the distribution and transmission overhauls. services segment. In early 2015, an estimated 19.5 million horsepower of pressure pumping units were working in North America. By late 2016, the working horsepower in North America had declined to an estimated 9.0 million. The Company also services offshore supply vessels and offshore drilling rigs operating in the Gulf of Mexico, as well as internationally. Low energy prices also negatively impacted the number of wells drilled in the Gulf of Mexico and international waters. These contributing factors resulted in a negative impact on the distribution and services segment’s revenues and profits in 2015 and 2016.
The United States land rig count has improved in 2017 and the 2018 first nine months from the lows ofin 2016, oil prices have traded in the $40 to $55$75 per barrel range, during 2017, and service intensity in the well completion business has increased. TheIn addition, the condition of the industry’s inactive pressure pumping fleet remains poor. Based on these positive conditions, the Company experienced a better market in 2017 and the first nine months of 2018 and anticipates thatthe trend to continue through the 2018 fourth quarter for the fourth quarter of 2017 thestrong demand for pressure pumping unit remanufacturing will remain strong and that increasedthis demand is anticipated to generate orders for the manufacture of pressure pumping units and ancillary oilfield service support equipment. The Company also anticipatesHowever, the strong demand has challenged the Company’s vendor supply chain throughout 2018, creating delays for the delivery of new engines, transmissions and parts required for the completion of both new and remanufactured oilfield service equipment, including pressure pumping units, and impacted the recognition of revenue. Additionally, temporary reductions in oilfield activity is expected to persist in the 2018 fourth quarter and result in lower demand for rental of standby power generators, elevated asnew and overhauled transmissions. As a result of hurricane related demand in Texasthese dynamics, the Company expects revenues and Florida during late August and September, will return to normal levelsprofits in the distribution and services oil and gas market for the 2018 fourth quarter.quarter to be flat to up modestly compared to the 2018 third quarter and reduced as compared to the 2018 first half.
For the marinedistribution and services commercial and industrial market, the Company anticipates continued weaknessthe 2018 fourth quarter to be flat to modestly down over the 2018 third quarter, primarily driven by seasonal declines in demand for standby power generation and other specialty equipment rentals following the Gulf of Mexico oilfield services market,hurricane season, as well as reduction in sales of refrigeration units following the inland and coastal tank barge markets and inland dry cargo barge market, throughout the fourth quarter of 2017. The power generation market should remain stable, benefiting from engine-generator set upgrades and parts sales for both domestic and international customers.summer peak.
Acquisitions
On October 20, 2017, San Jac,May 10, 2018, the Company completed the purchase of Targa’s inland tank barge business from a subsidiary of Targa for $69,250,000 in cash. Targa’s inland tank barge fleet consisted of 16 pressure barges with a total capacity of 258,000 barrels, many of which were under multi-year contracts that the Company purchased certain assets of Sneed Shipbuilding, Inc. for $14,905,000 in cash including its Channelview, Texas shipyard. San Jac is a builder of marine vessels for both inlandassumed from Targa. The 16 tank barges transport petrochemicals on the Mississippi River System and offshore applications as well providing repair and maintenance services. The Company intends to build towboats at the shipyard and use the facilities for routine maintenance. The Company has not completed the final purchase price allocation at this time.Gulf Intracoastal Waterway. Financing of the assetbusiness acquisition was through borrowings under the Company’s revolving credit facility.
On September 13, 2017, the Company completed the acquisition of substantially all of the assets of S&S, a global manufacturer and distributor of products and services for the oil and gas, marine, construction, power generation, transportation, mining and agricultural industries. The acquired business, which the Company operates through a newly formed subsidiary renamed Stewart & Stevenson LLC after the closing of the acquisition, was founded in 1902 and serves domestic and global markets with equipment, rental solutions, parts and service through a strategic network of sales and service centers in domestic and international locations.
The total value of the transaction was $758,245,000, before post-closing adjustments and excluding transaction fees, consisting of cash consideration of $377,967,000, the assumption of $13,724,000 of debt and $366,554,000 through the issuance of 5,696,259 shares of Company common stock valued at $64.35 per share, the Company’s closing share price on September 13, 2017. The debt assumed consists of $12,135,000 of term debt and $1,589,000 of short-term secured loans related to the Company’s South American operations. The term debt has a maturity date of September 15, 2032 and carries an interest rate of 4.0%. The term debt has quarterly interest payments plus quarterly principal payments of $375,000 due through December 2022 and $99,000 due thereafter through the maturity date. The term debt can be paid off prior to maturity without penalty. Financing of the acquisition was through a combination of the Company’s revolving credit facility and the issuance of Company common stock.
S&S, headquartered in Houston, Texas with 42 branches across 12 states, is a distributor in certain geographic areas for Allison Transmission, MTU Detroit Diesel, Electro-Motive Diesel, Deutz and several other manufacturers. S&S’ principal customers are oilfield service companies, oil and gas operators and producers, and companies in the marine, construction, power generation, transportation, mining and agricultural industries.
On July 10, 2017,March 15, 2018, the Company completed the purchase of certainpurchased two inland marine assets from an undisclosed competitor for $68,000,000 in cash. The assets purchased consisted of nine specialty pressure tank barges four 30,000 barrel tank barges and three 1320 horsepower inland towboats.from a competitor for $10,400,000 in cash. The average age of the 13 inlandtwo tank barges was five years. The 13 tank barges transport petrochemicals and refined petroleum products on the Mississippi River System and the Gulf Intracoastal Waterway. Financing of the equipment acquisition was through borrowings under the Company’s revolving credit facility.
During July 2017,On February 14, 2018, the Company purchased fourcompleted the acquisition of Higman for $421,922,000 in cash, subject to certain post-closing adjustments. Higman’s fleet consisted of 163 inland tank barges, for $1,450,000 as well as a barge fleetingincluding two barges to be leased upon completion of their construction in 2018, with 4.8 million barrels of capacity, and marine fueling operation business in Freeport, Texas for $3,900,000.75 inland towboats, transporting petrochemicals, black oil, including crude oil and natural gas condensate, and refined petroleum products on the Mississippi River System and the Gulf Intracoastal Waterway. The average age of the inland tank barges was approximately seven years and the inland towboats had an average age of approximately eight years. Financing of the acquisitionsacquisition was through the Company’s operating cash flows.issuance of $500,000,000 under the 2028 Notes. The 2028 Notes were issued on February 12, 2018 in preparation for closing of the acquisition.
Results of Operations
For theThe Company reported 2018 third quarter net earnings attributable to Kirby of $41,816,000, or $0.70 per share, on revenues of $704,845,000, compared with 2017 third quarter net earnings attributable to Kirby wereof $28,607,000, or $0.52 per share, on revenues of $541,274,000, compared with 2016 third quarter net$541,274,000. Net earnings attributable to Kirby of $32,010,000,for the 2018 first nine months were $102,889,000, or $0.59$1.72 per share, on revenues of $434,708,000. For the 2017 first nine months, net earnings attributable to Kirby were$2,249,204,000, compared with $81,868,000, or $1.50 per share, on revenues of $1,506,307,000 compared with 2016for the 2017 first nine months. The 2018 third quarter and first nine months net earnings attributable to Kirbyreflected the integration of $109,051,000,Targa’s pressure barge fleet, acquired on May 10, 2018, and the integration of Higman, acquired on February 14, 2018. The 2018 second quarter included a one-time non-deductible expense of $18,057,000, or $2.02$0.30 per share, related to the retirement of Joseph H. Pyne as executive Chairman of the Board of Directors, effective April 30, 2018. The 2018 first quarter included $3,261,000 before taxes, or $0.04 per share, of one-time transaction costs associated with the Higman acquisition, as well as $2,912,000 before taxes, or $0.04 per share, of severance and retirement expenses, primarily related to cost reduction initiatives in the coastal marine transportation market and the integration of Higman. In addition, the 2018 first quarter included $3,938,000 before taxes, or $0.05 per share, of non-cash expenses related to an amendment to the employee stock award plan. The result of the amendment is shorter expense accrual periods on revenuesstock options and RSUs granted after February 19, 2018 to employees who are nearing retirement and meet certain years of $1,335,023,000.
service and age requirements. The 2017 third quarter and first nine months results included a contribution of $0.03 and $0.02, respectively, per share from the S&S business, acquired on September 13, 2017. The S&S contribution waswere negatively impacted by pre-tax expenses related to the acquisition related costs of $707,000, or $0.01 per share, in the 2017 second quarter, andS&S of $764,000, or $0.01 per share, in the 2017 third quarter. The 2017 third quarter and first nine months also included an estimated net $0.03$1,471,000, or $0.02 per share, negative impact of Hurricane Harvey, which made landfall along the Gulf Coast in late August 2017, impacting the marine transportation and distribution and services operations, and Hurricane Irma, which disrupted the coastal marine transportation and distribution and services operations along the East Coast. The 2016 first nine months results included $5,605,000 before taxes, or $0.06 per share, of severance charges incurred in the 2016 first quarter. The severance charges were a reduction in force across the marine transportation and distribution and services businesses and corporate staff in order to reduce costs in light of challenging market conditions.respectively.
The following table sets forth the Company’s marine transportation and distribution and services revenues for the 20172018 third quarter compared with the third quarter of 2016,2017, the first nine months of 20172018 compared with the first nine months of 20162017 and the percentage of each to total revenues for the comparable periods (dollars in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | % | | | 2016 | | | % | | | 2017 | | | % | | | 2016 | | | % | | | 2018 | | | % | | | 2017 | | | % | | | 2018 | | | % | | | 2017 | | | % | |
| Marine transportation | | $ | 318,810 | | | | 59 | % | | $ | 359,031 | | | | 83 | % | | $ | 993,727 | | | | 66 | % | | $ | 1,115,677 | | | | 84 | % | | $ | 382,040 | | | | 54 | % | | $ | 318,810 | | | | 59 | % | | $ | 1,100,606 | | | | 49 | % | | $ | 993,727 | | | | 66 | % |
| Distribution and services | | | 222,464 | | | | 41 | | | | 75,677 | | | | 17 | | | | 512,580 | | | | 34 | | | | 219,346 | | | | 16 | | | | 322,805 | | | | 46 | | | | 222,464 | | | | 41 | | | | 1,148,598 | | | | 51 | | | | 512,580 | | | | 34 | |
| | | $ | 541,274 | | | | 100 | % | | $ | 434,708 | | | | 100 | % | | $ | 1,506,307 | | | | 100 | % | | $ | 1,335,023 | | | | 100 | % | | $ | 704,845 | | | | 100 | % | | $ | 541,274 | | | | 100 | % | | $ | 2,249,204 | | | | 100 | % | | $ | 1,506,307 | | | | 100 | % |
Marine Transportation
The Company, through its marine transportation segment, is a provider of marine transportation services, operating tank barges and towing vessels transporting bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, coastwise along all three United States coasts and in Alaska and Hawaii. The Company transports petrochemicals, black oil, refined petroleum products and agricultural chemicals by tank barge. As of September 30, 2017,2018, the Company operated 981 inland tank barges, including 32 leased barges, with a total capacity of 21.6 million barrels. This compares with 848 inland tank barges operated as of September 30, 2017, including 31 leased barges, with a total capacity of 17.4 million barrels. This compares with 881 inland tank barges operated as of September 30, 2016, including 35 leased barges, with a total capacity of 17.9 million barrels. The Company operated an average of 215282 inland towboats during the 2018 third quarter, of which an average of 75 were chartered, compared with 215 during the 2017 third quarter, of which an average of 59 were chartered, compared with 227 during the 2016 third quarter, of which an average of 69 were chartered. The Company’s coastal tank barge fleet as of September 30, 20172018, consisted of 6754 tank barges, six of which were leased, with 5.1 million barrels of capacity, and 50 tugboats, four of which were chartered. This compares with 67 coastal tank barges operated as of September 30, 2017, seven of which were leased, with 6.2 million barrels of capacity, and 70 tugboats, five of which were chartered. This compares with 68 coastal tank barges operated as of September 30, 2016, seven of which were leased, with 6.0 million barrels of capacity, and 80 tugboats, six of which were chartered. The Company owns and operates five offshore dry-bulk cargo barges and five offshore tugboats engaged in the offshore transportation of dry-bulk cargoes. The Company also owns shifting operations and fleeting facilities for dry cargo barges and tank barges on the Houston Ship Channel and in Freeport, Texas, a shipyard for building towboats and performing routine maintenance near the Houston Ship Channel, as well as a two-thirds interest in Osprey Line, L.L.C., which transports project cargoes and cargo containers by barge.
The following table sets forth the Company’s marine transportation segment’s revenues, costs and expenses, operating income and operating margins for the three months and nine months ended September 30, 20172018 compared with the three months and nine months ended September 30, 20162017 (dollars in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | % Change | | | 2017 | | | 2016 | | | % Change | | | 2018 | | | 2017 | | | % Change | | | 2018 | | | 2017 | | | % Change | |
| Marine transportation revenues | | $ | 318,810 | | | $ | 359,031 | | | | (11 | )% | | $ | 993,727 | | | $ | 1,115,677 | | | | (11 | )% | | $ | 382,040 | | | $ | 318,810 | | | | 20 | % | | $ | 1,100,606 | | | $ | 993,727 | | | | 11 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs of sales and operating expenses | | | 204,711 | | | | 226,543 | | | | (10 | ) | | | 652,402 | | | | 681,887 | | | | (4 | ) | | | 248,347 | | | | 205,104 | | | | 21 | | | | 744,154 | | | | 652,474 | | | | 14 | |
| Selling, general and administrative | | | 26,825 | | | | 26,089 | | | | 3 | | | | 82,289 | | | | 85,386 | | | | (4 | ) | | | 29,408 | | | | 26,825 | | | | 10 | | | | 94,456 | | | | 82,287 | | | | 15 | |
| Taxes, other than on income | | | 5,651 | | | | 4,880 | | | | 16 | | | | 17,598 | | | | 14,671 | | | | 20 | | | | 8,624 | | | | 5,651 | | | | 53 | | | | 23,805 | | | | 17,598 | | | | 35 | |
| Depreciation and amortization | | | 45,581 | | | | 46,059 | | | | (1 | ) | | | 134,376 | | | | 135,752 | | | | (1 | ) | | | 47,144 | | | | 45,581 | | | | 3 | | | | 135,266 | | | | 134,376 | | | | — | |
| | | | 282,768 | | | | 303,571 | | | | (7 | ) | | | 886,665 | | | | 917,696 | | | | (3 | ) | | | 333,523 | | | | 283,161 | | | | 18 | | | | 997,681 | | | | 886,735 | | | | 13 | |
| Operating income | | $ | 36,042 | | | $ | 55,460 | | | | (35 | )% | | $ | 107,062 | | | $ | 197,981 | | | | (46 | )% | | $ | 48,517 | | | $ | 35,649 | | | | 36 | % | | $ | 102,925 | | | $ | 106,992 | | | | (4 | )% |
| Operating margins | | | 11.3 | % | | | 15.4 | % | | | | | | | 10.8 | % | | | 17.7 | % | | | | | | | 12.7 | % | | | 11.2 | % | | | | | | | 9.4 | % | | | 10.8 | % | | | | |
Marine Transportation Revenues
The following table shows the marine transportation markets serviced by the Company, the marine transportation revenue distribution for the 20172018 third quarter and first nine months, products moved and the drivers of the demand for the products the Company transports:
| Markets Serviced | | 2017 Third Quarter Revenue Distribution | | | 2017 Nine Months Revenue Distribution | | Products Moved | | Drivers | | 2018 Third Quarter Revenue Distribution | | | 2018 Nine Months Revenue Distribution | | Products Moved | | Drivers |
| Petrochemicals | | | 56% | | | | 55% | | Benzene, Styrene, Methanol, Acrylonitrile, Xylene, Naphtha, Caustic Soda, Butadiene, Propylene | | Consumer non-durables – 70%, Consumer durables – 30% | | | 57% |
| | | 56% |
| Benzene, Styrene, Methanol, Acrylonitrile, Xylene, Naphtha, Caustic Soda, Butadiene, Propylene | | Consumer non-durables – 70%, Consumer durables – 30% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Black Oil | | | 22% | | | | 24% | | Residual Fuel Oil, Coker Feedstock, Vacuum Gas Oil, Asphalt, Carbon Black Feedstock, Crude Oil, Natural Gas Condensate, Ship Bunkers | | Fuel for Power Plants and Ships, Feedstock for Refineries, Road Construction | | | 22% |
| | | 21% |
| Residual Fuel Oil, Coker Feedstock, Vacuum Gas Oil, Asphalt, Carbon Black Feedstock, Crude Oil, Natural Gas Condensate, Ship Bunkers | | Fuel for Power Plants and Ships, Feedstock for Refineries, Road Construction |
| | | | | | | | | | | | | | | | | | | | | | | |
| Refined Petroleum Products | | | 18% | | | | 18% | | Gasoline, No. 2 Oil, Jet Fuel, Heating Oil, Diesel Fuel, Ethanol | | Vehicle Usage, Air Travel, Weather Conditions, Refinery Utilization | | | 18% |
| | | 19% |
| Gasoline, No. 2 Oil, Jet Fuel, Heating Oil, Diesel Fuel, Ethanol | | Vehicle Usage, Air Travel, Weather Conditions, Refinery Utilization |
| | | | | | | | | | | | | | | | | | | | | | | |
| Agricultural Chemicals | | | 4% | | | | 3% | | Anhydrous Ammonia, Nitrogen – Based Liquid Fertilizer, Industrial Ammonia | | Corn, Cotton and Wheat Production, Chemical Feedstock Usage | | | 3% |
| | | 4% |
| Anhydrous Ammonia, Nitrogen – Based Liquid Fertilizer, Industrial Ammonia | | Corn, Cotton and Wheat Production, Chemical Feedstock Usage |
Marine transportation revenues for the 2018 third quarter and first nine months increased 20% and 11%, respectively, when compared with the 2017 third quarter and first nine months revenues. The increases were primarily due to the addition of the Higman inland tank barges acquired on February 14, 2018 and the Targa pressure barges acquired on May 10, 2018, and improved barge utilization and spot contract pricing in the inland market. Partially offsetting these increases were lower term and spot contract pricing in the coastal market, weaker average term contract pricing in the inland market in the 2018 first half, poor seasonal weather conditions in the first four months of 2018, and fewer coastal tank barges available with the impairment and retirement of 12 tank barges in the 2017 fourth quarter. Demand in the coastal markets continued to be impacted by the oversupply of tank barges in the coastal industry. For the 20172018 and 20162017 third quarters and first nine months, the inland tank barge fleet contributed 72%76% and 66%69%, respectively, and the coastal fleet 28%contributed 24% and 34%31%, respectively, of marine transportation revenues. MarineTank barge utilization levels of the Company’s inland marine transportation revenues formarkets were in the low to mid-90% range in the 2018 third quarter compared with the high 80% to low 90% range during the 2018 second quarter and mid-80% to mid-90% range during the 2017 third quarter. Increasing volumes from petrochemical and black oil customers, lock infrastructure projects in Louisiana as well as on the Ohio River, and refinery turnarounds contributed to increased utilization during the 2018 third quarter compared to the 2018 second quarter. Lower utilization levels in the 2017 third quarter and first nine months decreased 11% when compared with the 2016 third quarter and first nine months, primarilywere due to the industry-wide oversupply of tank barges in both the inland and coastal markets, resulting in lower inland marine transportation term and spot contract pricing, lower coastal marine transportation spot contract pricing and lower coastal equipment utilization. In addition, a continued increase in the number of coastal vesselsdeteriorated operating in the spot market led to increased idle time and decreased revenues, partially offset by an increase in the average cost of marine diesel fuel which is largely passed through to the customer and the addition of the nine specialty pressure tank barges and four 30,000 barrel tank barges purchased in July 2017.
The 2017 third quarter and nine months revenue decrease was also due to the loss of revenue in the inland and coastal marine transportation markets associated with Hurricanes Harvey and Irma. Operating conditions for the Company’s inland marine transportation markets deteriorated significantly after Hurricane Harvey made land-fall on the Gulf Coast at the end of August.August 2017. Unrelated and coinciding infrastructure repairs on the upper Mississippi River further decreased operating efficiency in September. The effect was an increase in inland tank barge utilization levels after Hurricane Harvey from the mid-80% to the mid-90% range during the balance of third quarter compared to the mid-80% to high 80% range during the 2017 second quarter, the high 80% to low 90% range during the 2017 first quarter and the low-to-mid 80% range for the 2016 third quarter. As the third quarter concluded, recoveries from marine customers for delays, pent-up demand for liquid barge movements as the Gulf Coast petrochemical and refinery complex returned to normal operations and a stronger pricing environment for customers’ products partially mitigated the negative impact of the hurricanes. The decline in utilization from the 2017 first quarter to the 2017 second quarter was mainly due to better weather conditions along the Gulf Coast, which enhanced operating efficiency and thereby lowered tank barge utilization, and also due to seasonally weak demand for the transportation of agricultural chemicals.
September 2017. Coastal tank barge utilization levels declined towere in the 80% range during the 2018 second and third quarters compared with the high 70% range during the 2018 first quarter and low 60% to mid-60% range from the high 60% to mid-70% range during the 2017 second quarter, the mid-70% to low 80% range during the 2017 first quarter and the low-to-mid 80% range in the 2016 third quarter. UtilizationThe coastal utilization improvement in 2018 was primarily due to the impairment and retirement of 12 coastal marine fleet continued to be impacted by the industry-wide oversupply of tank barges in the coastal industry and weak demand for the transportation of refined petroleum products and crude oil.2017 fourth quarter.
The petrochemical market, the Company’s largest market, contributed 57% and 56%, of marine transportation revenues for the 20172018 third quarter and 55% for the first nine months, respectively, reflecting continued stable volumes from Gulf Coast petrochemical plants for both domestic consumption and to terminals for export destinations, the addition of the Targa pressure barges in May 2018 and the addition of the nine specialty pressure tank barges and four 30,000 barrel tank barges purchasedacquired in July 2017. Low priced domestic natural gas, a basic feedstock for the United States petrochemical industry, provides the industry with a competitive advantage relative to naphtha-based foreign petrochemical producers. In addition, favorable commodity prices and the addition of new petrochemical industry capacity during 2017 and the 2018 first nine months benefited the market.
The black oil market, which contributed 22% and 21% of marine transportation revenues for the 20172018 third quarter and 24% for the first nine months, respectively, reflected higher fleet utilizationrevenues in the inland market comparedprimarily due to demand in the 2016 third quarter.addition of the Higman fleet. The Company continued to transport crude oil and natural gas condensate produced from the Eagle Ford and Permian Basin shale formations in Texas both along the Gulf Intracoastal Waterway with inland vessels and in the Gulf of Mexico with coastal equipment, and continued to transport Utica natural gas condensate downriver from the Mid-Atlantic to the Gulf Coast, however at much reduced levels compared with the 2016 third quarter and first nine months. DemandCoast. Revenues for the transportation of black oil products in the coastal market induring the 2018 third quarter and first nine months were lower compared with the 2017 third quarter was lower when compared to the 2016 third quarterand first nine months due to the continued industry-wide oversupplyover supply of tank barges in the coastal industry.
The refined petroleum products market, which contributed 18% and 19% of marine transportation revenues for the 20172018 third quarter and first nine months, respectively, reflected weaker demandstronger volumes in both the inland andmarket primarily due to the addition of the Higman fleet, partially offset by lower utilization in the coastal markets,market, primarily a result of the oversupply of coastal tank barge capacity, as well as weak heating oil demand in the 2017 first quarter due to the unseasonably warm weather in the Northeast.capacity.
The agricultural chemical market, which contributed 3% and 4% of marine transportation revenues for the 20172018 third quarter and 3% for the first nine months, respectively, saw typical seasonal demand for transportation of both domestically produced and imported products during the 2018 first and third quarters and a typical seasonal decline in demand in the second quarter.nine months.
For the third quarter of 2017,2018, the inland operations incurred 1,9652,534 delay days, 112%29% more than the 9291,965 delay days that occurred during the 20162017 third quarter and 44%46% more than the 1,3671,735 delay days that occurred during the 20172018 second quarter. For the first nine months of 2017, 5,5992018, 6,797 delay days occurred, 8%21% more than the 5,2005,599 delay days that occurred during the 20162017 first nine months. Delay days measure the lost time incurred by a tow (towboat and one or more tank barges) during transit when the tow is stopped due to weather, lock conditions or other navigational factors. The increase in delay days for the 20172018 third quarter compared to the 20162017 third quarter and the 20172018 second quarter reflected lost time incurred during and after Hurricane Harveydue to periodic closures at two locks in late August and September andLouisiana as well as one on the Ohio River during the unrelated2018 third quarter. The increase in delay days for the 2018 first nine months compared to the 2017 first nine months reflected the lock infrastructure projects in the 2018 third quarter and coinciding upper Mississippithe challenging operating conditions in the 2018 first quarter due to ice on the Illinois River, infrastructure repairsissues on the Ohio River, seasonal fog and high winds, as well as lock delays along the Gulf Intracoastal Waterway. High water conditions on the Ohio and Mississippi Rivers in September.the first four months of 2018 also increased delay days.
During the 2018 third quarter and first nine months, approximately 65% of marine transportation inland revenues were under term contracts 35% were spot contract revenues. For the 2017 third quarter and first nine months, approximately 75% of marine transportation inland revenues were under term contracts and 25% were spot contract revenues. For the 2016 third quarter and first nine months, approximately 80% of inland revenues were under term contracts and 20% were spot contract revenues. Inland time charters during the 20172018 third quarter and first nine months represented 48%58% and 59%, respectively, of the revenues under term contracts compared with 52% and 53%48% in the 20162017 third quarter and first nine months, respectively.months. Rates on inland term contracts renewed in the 2018 first quarter decreased in the 4% to 6% average range compared with term contracts renewed in the first quarter of 2017. Rates on inland term contracts renewed in the 2018 second quarter increased in the 1% to 3% average range compared with term contracts renewed in the second quarter of 2017. In the 2018 third quarter, rates on inland term contracts renewed increased in the 3% to 5% average range compared with term contracts renewed in the third quarter of 2017. Spot contract rates increased in the 3% to 5% range in the 2018 third quarter compared to the 2018 second quarter and increased in the 20% to 25% range compared to the 2017 third quarter. Effective January 1, 2018, annual escalators for labor and the producer price index on a number of inland multi-year contracts resulted in rate increases on those contracts of approximately 1.0%, excluding fuel.
During the 20172018 and 20162017 third quarters and first nine months, approximately 80% of the coastal revenues were under term contracts and 20% were spot contract revenues. Coastal time charters represented approximately 85% of coastal revenues under term contracts during the 2018 and 2017 third quarterquarters and first nine monthsmonths. Spot contract pricing for the 2018 third quarter was stable compared with 90% duringpricing for the 20162018 first half. Term contract pricing for the 2018 third quarter andwas modestly higher compared to the 2018 first nine months.
Rates on inland term contracts renewed inhalf. However, compared with the 2017 third quarter and first nine months, continued to deteriorate due to excess industry capacity, decreasingboth term and spot contract pricing declined in the 4%10% to 8% average15% range, compared with term contracts renewed in the third quarter and first nine months of 2016. Spot contract rates, which include the cost of fuel, were relatively flat when compared with the 2017 first and second quarters, but below term contract rates. Effective January 1, 2017, annual escalators for labor and the producer price indexcontingent on a number of inland multi-year contracts resulted in rate increases on those contracts of approximately 0.6%, excluding fuel.
There were no coastal term contracts renewed in the 2017 third quarter as customers elected to source their needs in the spot market. Rates on coastal term contracts renewed in the 2017 first six months were down slightly compared to term contracts renewed in the 2016 comparable periods, although most contracts failed to renew and customers elected to source their needs in the spot market. Spot contract rates, which include the cost of fuel, remained meaningfully below term contract rates during the first nine months of 2017, the degree to which varies based on geography,various factors including geographic location, vessel capacity, vessel type and product service.serviced.
Marine Transportation Costs and Expenses
Costs and expenses for the 20172018 third quarter and first nine months decreased 7%increased 18% and 3%13%, respectively, when compared with the 20162017 third quarter and first nine months. Costs of sales and operating expenses for the 2018 third quarter and first nine months increased 21% and 14%, respectively, compared with the 2017 third quarter and first nine months, decreased 10% and 4%, respectively, compared with the third quarter and first nine months of 2016, primarily due to fewerthe addition of the Higman fleet of inland tank barges and towboats operatedin February 2018 and lower business activity levels, partially offset by higher fuel costs and costs and expenses associated with Hurricanes Harvey and Irma.costs.
The inland marine transportation fleet operated an average of 282 towboats during the 2018 second quarter, of which an average of 75 were chartered, compared with 215 towboats during the 2017 third quarter, of which an average of 59 were chartered, compared with 227 during the 2016 third quarter, of which an average of 69 were chartered. During the 20172018 first nine months, the inland operations operated an average of 224275 towboats, of which an average of 6873 towboats were chartered, compared with 236224 towboats operated during the 20162017 first nine months, of which an average of 7868 were chartered. AsThe increase was primarily due to the addition of inland towboats with the Higman acquisition on February 14, 2018. Generally as demand, or anticipated demand, increases or decreases, as new tank barges are added to the fleet, as chartered towboat availability changes, or as weather or water conditions dictate, such as the high wind and heavy fog conditions that occurred in the 2017 first quarter, the Company charters in or releases chartered towboats in an effort to balance horsepower needs with current requirements. The Company has historically used chartered towboats for approximately one-third of its horsepower requirements.
During the 20172018 third quarter, the inland operations consumed 9.512.9 million gallons of diesel fuel compared to 9.89.5 million gallons consumed during the 20162017 third quarter.quarter, driven by the Higman acquisition. The average price per gallon of diesel fuel consumed during the 20172018 third quarter was $1.61$2.23 per gallon compared with $1.59$1.61 per gallon for the 20162017 third quarter. For the 20172018 first nine months, the inland operations consumed 30.036.8 million gallons of diesel fuel compared to 29.830.0 million gallons consumed during the 20162017 first nine months.months, driven by the Higman acquisition. The average price per gallon of diesel fuel consumed during the 20172018 first nine months was $1.71$2.13 compared with $1.40$1.71 for the 20162017 first nine months. Fuel escalation and de-escalation clauses on term contracts are designed to rebate fuel costs when prices decline and recover additional fuel costs when fuel prices rise; however, there is generally a 30 to 90 day delay before the contracts are adjusted. Spot contracts do not have escalators for fuel.
Selling, general and administrative expenses for the 20172018 third quarter increased 3%10% compared with the 20162017 third quarter, primarily due to salary increases effective August 1, 2016the addition of Higman personnel and April 1, 2017,related expenses plus higher incentive compensation accruals and higher professional fees.accruals. For the 20172018 first nine months, selling, general and administrative expenses decreased 4%increased 15% compared with the 2016 first nine months, primarily a reflection of $3,792,000 of severance charges incurred in the 2016 first quarter and the resulting cost savings in the 2017 first nine months frommonths. The increase included $3,261,000 of transaction costs, consisting primarily of legal, audit and other professional fees associated with the Higman acquisition, severance charges of $2,591,000 associated with the integration of Higman into the Company and further reduction in forceheadcount in early 2016, partially offset by salary increases effective August 1, 2016the coastal sector in order to manage costs, and April 1, 2017.$2,378,000 of non-cash expenses related to the amendment of the employee stock award plan; all of which were incurred in the 2018 first quarter.
Taxes, other than on income for the 20172018 third quarter and first nine months increased 16%53% and 20%35%, respectively, compared with the 20162017 third quarter and first nine months, mainly due to higher property taxes on marine transportation equipment, including the Higman and new state franchiseTarga fleets, and higher waterway use taxes effective January 1, 2017.due to higher business activity levels, mainly due to the Higman acquisition.
Marine Transportation Operating Income and Operating Margins
Marine transportation operating income for the 2018 third quarter increased 36% compared with the 2017 third quarter and decreased 4% for the 2018 first nine months decreased 35% and 46%, respectively, compared with the 2016 third quarter and2017 first nine months. The operating margin was 11.3%12.7% for the 2018 third quarter compared with 11.2% for the 2017 third quarter and 9.4% for the 2018 first nine months compared with 15.4%10.8% for the 2016 third quarter.2017 first nine months. The operating margin forincome increase in the 2018 third quarter, compared to the 2017 third quarter, was primarily due to the acquisitions of Higman and Targa’s pressure barge fleet, improved term and spot contract pricing in the inland market, and improved barge utilization in the inland market. The operating income decrease in the 2018 first nine months, compared with the 2017 first nine months, was 10.8% compared with 17.7% for the 2016 first nine months. The results primarily reflecteddue to lower inlandcoastal term and spot contract pricing, lower coastal spotweaker average inland term contract pricing lower coastal equipment utilization and a continued increase in coastal equipment vessels operating in the spot market which adds increased idle time2018 first half, and voyage costs, partially offset by savingspoor seasonal weather conditions in the coastal market from the releasefirst four months of chartered tugboats, idling owned barges2018. Higman transaction costs, severance and tugboatsretirement charges, and reducing headcount accordingly, and by a reduction in the average number of inland towboats operated. The 2017 third quarter and nine months operating income decreases were also dueexpenses related to the loss of revenue and additional operating expenses in the inland and coastal marine transportation markets associated with Hurricanes Harvey and Irma. As the third quarter concluded, recoveries from marine customers for delays, pent-up demand for liquid barge movements as the Gulf Coast petrochemical and refinery complex returned to normal operations and a stronger pricing environment for customers’ products partially mitigated the negative impactamendment of the hurricanes.employee stock award plan also negatively impacted the 2018 first quarter.
Distribution and Services
The Company, through its distribution and services segment, sells genuine replacement parts, provides service mechanics to overhaul and repair engines, transmissions, reduction gears and related oilfield services equipment, rebuilds component parts or entire diesel engines, transmissions and reduction gears, and related equipment used in oilfield services, marine, mining, power generation, on-highway and other industrial applications. The Company also rents equipment including generators, fork lifts, pumps and compressors for use in a variety of industrial markets, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, for the land-based oilfield service and oil and gas operator and producer markets.
The following table sets forth the Company’s distribution and services segment’s revenues, costs and expenses, operating income and operating margins for the three months and nine months ended September 30, 20172018 compared with the three months and nine months ended September 30, 20162017 (dollars in thousands):
| | | Three months ended September 30, | | | Nine months ended September 30, | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2017 | | | 2016 | | | % Change | | | 2017 | | | 2016 | | | % Change | | | 2018 | | | 2017 | | | % Change | | | 2018 | | | 2017 | | | % Change | |
| Distribution and services revenues | | $ | 222,464 | | | $ | 75,677 | | | | 194 | % | | $ | 512,580 | | | $ | 219,346 | | | | 134 | % | | $ | 322,805 | | | $ | 222,464 | | | | 45 | % | | $ | 1,148,598 | | | $ | 512,580 | | | | 124 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs of sales and operating expenses | | | 173,629 | | | | 55,625 | | | | 212 | | | | 395,774 | | | | 166,088 | | | | 138 | | | | 250,074 | | | | 173,646 | | | | 44 | | | | 896,212 | | | | 395,825 | | | | 126 | |
| Selling, general and administrative | | | 21,232 | | | | 11,709 | | | | 81 | | | | 52,307 | | | | 40,018 | | | | 31 | | | | 36,965 | | | | 21,242 | | | | 74 | | | | 115,682 | | | | 52,336 | | | | 121 | |
| Taxes, other than on income | | | 856 | | | | 554 | | | | 55 | | | | 1,879 | | | | 1,607 | | | | 17 | | | | 1,888 | | | | 856 | | | | 121 | | | | 5,762 | | | | 1,879 | | | | 207 | |
| Depreciation and amortization | | | 4,773 | | | | 3,155 | | | | 51 | | | | 10,557 | | | | 9,773 | | | | 8 | | | | 9,964 | | | | 4,773 | | | | 109 | | | | 29,873 | | | | 10,557 | | | | 183 | |
| | | | 200,490 | | | | 71,043 | | | | 182 | | | | 460,517 | | | | 217,486 | | | | 112 | | | | 298,891 | | | | 200,517 | | | | 49 | | | | 1,047,529 | | | | 460,597 | | | | 127 | |
| Operating income | | $ | 21,974 | | | $ | 4,634 | | | | 374 | % | | $ | 52,063 | | | $ | 1,860 | | | | 2699 | % | | $ | 23,914 | | | $ | 21,947 | | | | 9 | % | | $ | 101,069 | | | $ | 51,983 | | | | 94 | % |
| Operating margins | | | 9.9 | % | | | 6.1 | % | | | | | | | 10.2 | % | | | 0.8 | % | | | | | | | 7.4 | % | | | 9.9 | % | | | | | | | 8.8 | % | | | 10.1 | % | | | | |
Distribution and Services Revenues
The following table shows the markets serviced by the Company’s distribution and services segment, the revenue distribution for the 20172018 third quarter and first nine months, and the customers for each market:
| Markets Serviced | | 2017 Third Quarter Revenue Distribution | | | 2017 Nine Months Revenue Distribution | | Customers |
| Land-Based | | | 80% | | | | 76% | | Land-Based Oilfield Services, Oil and Gas Operators and Producers, On-Highway Transportation, Construction, Mining, Agriculture |
| | | | | | | | | | |
| Marine | | | 13% | | | | 17% | | Inland River Carriers – Dry and Liquid, Offshore Towing – Dry and Liquid, Offshore Oilfield Services – Drilling Rigs & Supply Boats, Harbor Towing, Dredging, Great Lakes Ore Carriers |
| | | | | | | | | | |
| Power Generation | | | 7% | | | | 7% | | Standby Power Generation, Pumping Stations |
| Markets Serviced | | 2018 Third Quarter Revenue Distribution | | | 2018 Nine Months Revenue Distribution | | Customers |
| Oil and Gas | | | 62% |
| | | 68% |
| Oilfield Services, Oil and Gas Operators and Producers |
| | | | | | | | | | |
| Commercial and Industrial | | | 38% |
| | | 32% |
| Inland River Carriers — Dry and Liquid, Offshore Towing — Dry and Liquid, Offshore Oilfield Services — Drilling Rigs & Supply Boats, Harbor Towing, Dredging, Great Lakes Ore Carriers, Pleasure Crafts, On and Off-Highway Transportation, Power Generation, Standby Power Generation, Pumping Stations, Mining |
Distribution and services revenues for the 20172018 third quarter and first nine months increased 194%45% and 134%124%, respectively, when compared with the 2016 third quarter and first nine months of 2017. The higher revenues and operating income were primarily attributable to the acquisition of S&S, completed on September 13, 2017, as well as increased demand in the land-basedoil and gas market for the remanufacturemanufacturing of oilfield service equipment, including new pressure pumping units, the sale and transmission overhauls, an improvementdistribution of engines and related parts, and improving market conditions in the manufacturingcommercial marine diesel engine repair business, partially offset by reduced demand in the 2018 third quarter for new and overhauled transmissions and related parts and remanufactured pressure pumping units from some key oilfield customers. For the 2018 third quarter and first nine months, the oil and gas market contributed 62% and 68%, respectively, of the distribution and services revenues. However, the strong demand challenged the Company’s vendor supply chain throughout 2018, creating delays for the delivery of new engines, transmissions and parts required for the completion of both new and remanufactured oilfield service equipment, including pressure pumping units, and an increaseimpacted the recognition of revenue. In the commercial and industrial market, which contributed 38% and 32% of the distribution and services revenues for the 2018 third quarter and first nine months, respectively, the marine sector experienced higher service levels for medium-speed diesel engine overhauls and related parts sales throughout the 2018 first nine months. The power generation sector saw increased demand from commercial customers for specialty rental units and back-up power systems in the demand for2018 second and third quarters in anticipation of and as a result of summer storms after the sale and distributionseasonal decline in the rental of engines, transmissions and related parts. Thestand-by power generators in the 2018 first quarter. Demand in the nuclear power generation market was stable compared to the 2017 third quarter and first nine months higher revenues also reflected the S&S acquisition on September 13, 2017. S&S benefited from elevated demand for rental equipment and increased service work as a result of pent-up demand following Hurricanes Harvey, Irma and Maria, as well as healthy demand for service work, parts sales and the manufacturing of pressure pumping equipment. In the marine market, customers continued to defer major maintenance projects, particularly in the Midwest and on the East Coast, largely due to the weak inland and coastal tank barge markets and inland dry cargo barge market. In addition, continued weakness in the Gulf of Mexico oilfield services market negatively impacted the marine market. The power generation market was relatively stable with major generator set upgrades and parts sales for both domestic and international power generation customers.months.
Distribution and Services Costs and Expenses
Costs and expenses for the 20172018 third quarter and first nine months increased 182%49% and 112%127%, respectively, compared with the 20162017 third quarter and first nine months. Costs of sales and operating expenses for the 20172018 third quarter and first nine months increased 212%44% and 138%126%, respectively, compared with the 20162017 third quarter and first nine months, reflecting the acquisition of S&S on September 13, 2017, as well as increased demand for the remanufacture of pressure pumping units and transmission overhauls, improvement in the manufacturing of oilfield service equipment, including pressure pumping units, and an increase in the demand for the sale and distribution of engines, transmissions and related parts in the land-based market,oil and the S&S acquisition on September 13, 2017.gas market.
Selling, general and administrative expenses for the 20172018 third quarter and first nine months increased 81%74% and 31%121%, respectively, compared with the 20162017 third quarter and first nine months, primarily due to the S&S acquisition, as well as increased activity in the land-based market in the 2017oil and gas market. The 2018 first nine months as well as the S&S acquisition on September 13, 2017. The 2016 first nine months selling, general and administrative expenses included $1,436,000 ofa $171,000 severance chargescharge incurred in the 20162018 first quarter associated with the integration of S&S into the Company and $1,168,000 of non-cash expenses, also incurred in responsethe 2018 first quarter, related to the reduced activity in bothamendment of the marine and land-based markets, which benefited both the land-based and marine markets during the 2017 third quarter and first nine months.employee stock award plan.
Distribution and Services Operating Income and Operating Margins
Operating income for the distribution and services segment for the 2017 third quarter and first nine months was $21,974,000increased 9% and $52,063,000,94%, respectively, compared to operating income of $4,634,000 and $1,860,000 forwith the 20162017 third quarter and first nine months, respectively.months. The operating margin for the 2018 third quarter was 7.4% compared with 9.9% for the 2017 third quarter was 9.9% compared with 6.1%and 8.8% for the 2016 third quarter and 10.2% for the 20172018 first nine months compared with 0.8%10.1% for the 20162017 first nine months. The results primarily reflected the earnings contribution of S&S and continued strong demand for the remanufacture of pressure pumping units and transmission overhauls, the manufacturing of oilfield service equipment, and the sale of new transmissions and related parts and the earnings contribution of S&S.parts.
General Corporate Expenses
General corporate expenses for the 2018 third quarter were $4,492,000 compared with $4,508,000 for the 2017 third quarter andquarter. For the 2018 first nine months, increased 19% and 9%, respectively,general corporate expenses were $31,822,000, a 154% increase compared with the corresponding 2016 periods, primarily due to acquisition costs of $764,000 in the 2017 third quarter and $1,471,000 in$12,551,000 for the 2017 first nine months, bothprimarily due to a one-time non-deductible expense of $18,057,000 in the 2018 second quarter related to the S&S acquisition.retirement of the Company’s executive Chairman, effective April 30, 2018, and higher incentive compensation accruals. The 2016Company's retired executive Chairman continues to serve as Chairman of the Board in a non-executive role. The 2018 first nine months included a severance charge of $377,000$392,000 incurred in the 20162018 first quarter.quarter due to the corporate portion of the amendment of the employee stock award plan.
Gain (Loss) on Disposition of Assets
The Company reported a net lossgain on disposition of assets of $18,000 for the 2018 third quarter compared with a net loss of $159,000 for the 2017 third quarter compared with a net gain of $122,000 for the 2016 third quarter. For the 20172018 first nine months, the Company reported a net lossgain on disposition of assets of $199,000$2,358,000 compared with a net gainloss of $39,000$199,000 for the 2017 first nine months of 2016.months. The net gains and losses were predominantly from the sale or retirement of marine equipment.equipment and the sale of distribution and services’ properties.
Other Income (Expense)and Expenses
The following table sets forth other income (expense), noncontrolling interests and interest expense for the three months and nine months ended September 30, 20172018 compared with the three months and nine months ended September 30, 20162017 (dollars in thousands):
| | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | Three months ended September 30, | | | Nine months ended September 30, | | | | | | | | | % | | | | | | | | | % | |
| | | 2017 | | | 2016 | | | % Change | | | 2017 | | | 2016 | | | % Change | | | 2018 | | | 2017 | | | Change | | | 2018 | | | 2017 | | | Change | |
| Other income (expense) | | $ | (113 | ) | | $ | (120 | ) | | | (6 | )% | | $ | (230 | ) | | $ | 194 | | | | ─ | % | | $ | 1,454 | | | $ | 320 | | | | 354 | % | | $ | 4,586 | | | $ | (41 | ) | | | n/a | |
| Noncontrolling interests | | $ | (182 | ) | | $ | (343 | ) | | | (47 | )% | | $ | (538 | ) | | $ | (895 | ) | | | (40 | )% | | $ | (134 | ) | | $ | (182 | ) | | | (26 | )% | | $ | (520 | ) | | $ | (538 | ) | | | (3 | )% |
| Interest expense | | $ | (5,388 | ) | | $ | (4,507 | ) | | | 20 | % | | $ | (14,310 | ) | | $ | (13,213 | ) | | | 8 | % | | $ | (12,345 | ) | | $ | (5,388 | ) | | | 129 | % | | $ | (34,665 | ) | | $ | (14,310 | ) | | | 142 | % |
Other Income (Expense)
Due to the Company’s adoption of ASU 2017-07 on January 1, 2018, other income for the 2018 third quarter and first nine months includes income of $1,159,000 and $3,375,000, respectively, for all components of net benefit costs except the service cost component related to the Company’s defined benefit plans. The standard was applied retrospectively resulting in a reclassification of income for the three months and nine months ended September 30, 2017 of $433,000 and $189,000, respectively, from operating expense to non-operating expense.
Interest Expense
Interest expense for the 20172018 third quarter and first nine months increased 20%129% and 8%142%, respectively, compared with the 2016 third quarter and first nine months, primarily the result of lower capitalized interest in the 2017 third quarter and first nine months, and increased interest expenseprimarily due to additional borrowing under the revolving credit facilityborrowings to finance the cash portion of the S&S acquisition.acquisition in September 2017, the Higman acquisition in February 2018, the acquisition of Targa’s pressure barge fleet in May 2018 and the purchase of the 155,000 barrel coastal ATB under construction in June 2018. During the 20172018 and 20162017 third quarters, the average debt and average interest rate (excluding capitalized interest) were $1,421,613,000 and 3.6%, and $724,389,000 and 3.0%, and $772,964,000 and 2.7%, respectively. For the first nine months of 20172018 and 2016,2017, the average debt and average interest rate (excluding capitalized interest) were $1,366,546,000 and 3.5%, and $691,374,000 and 3.0%, and $756,425,000 and 2.7%, respectively. The Company recognized additional interest expense of $187,000 in the 2017 second quarter due to the write-off of certain deferred issue costs in connection with an amendment of the Revolving Credit Facility. Interest expense excludes capitalized interest for the 20172018 and 20162017 third quarters of $208,000$808,000 and $786,000,$208,000, respectively, and for the 20172018 and 20162017 first nine months of $1,522,000$1,317,000 and $2,287,000,$1,522,000, respectively.
Financial Condition, Capital Resources and Liquidity
Balance Sheet
Total assets as of September 30, 20172018 were $5,200,415,000$5,854,332,000 compared with $4,289,895,000$5,127,427,000 as of December 31, 2016. The September 30, 2017 total assets reflected the S&S acquisition in September 2017 for $758,245,000 and the purchase in July 2017 of tank barges and towboats from an undisclosed competitor for $68,000,000, both more fully described under Acquisitions above.2017. The following table sets forth the significant components of the balance sheet as of September 30, 20172018 compared with December 31, 20162017 (dollars in thousands):
| | | September 30, 2017 | | | December 31, 2016 | | | % Change | | | September 30, 2018 | | | December 31, 2017 | | | % Change | |
| Assets: | | | | | | | | | | | | | | | | | | |
| Current assets | | $ | 890,764 | | | $ | 632,951 | | | | 41 | % | | $ | 1,054,520 | | | $ | 957,082 | | | | 10 | % |
| Property and equipment, net | | | 3,096,110 | | | | 2,921,374 | | | | 6 | | | | 3,561,500 | | | | 2,959,265 | | | | 20 | |
| Goodwill | | | 919,276 | | | | 598,131 | | | | 54 | | | | 960,006 | | | | 935,135 | | | | 3 | |
| Other intangibles, net | | | | 228,958 | | | | 232,808 | | | | (2 | ) |
| Other assets | | | 294,265 | | | | 137,439 | | | | 114 | | | | 49,348 | | | | 43,137 | | | | 14 | |
| | | $ | 5,200,415 | | | $ | 4,289,895 | | | | 21 | % | | $ | 5,854,332 | | | $ | 5,127,427 | | | | 14 | % |
| Liabilities and stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | |
| Current liabilities | | $ | 462,190 | | | $ | 358,338 | | | | 29 | % | | $ | 567,926 | | | $ | 480,306 | | | | 18 | % |
| Long-term debt – less current portion | | | 1,031,028 | | | | 722,802 | | | | 43 | | | | 1,399,423 | | | | 992,403 | | | | 41 | |
| Deferred income taxes | | | 756,268 | | | | 705,453 | | | | 7 | | | | 544,882 | | | | 468,451 | | | | 16 | |
| Other long-term liabilities | | | 74,801 | | | | 90,435 | | | | (17 | ) | | | 108,953 | | | | 72,044 | | | | 51 | |
| Total equity | | | 2,876,128 | | | | 2,412,867 | | | | 19 | | | | 3,233,148 | | | | 3,114,223 | | | | 4 | |
| | | $ | 5,200,415 | | | $ | 4,289,895 | | | | 21 | % | | $ | 5,854,332 | | | $ | 5,127,427 | | | | 14 | % |
Current assets as of September 30, 20172018 increased 41%10% compared with December 31, 2016. Trade accounts receivable2017. Inventories, net, increased 46%44%, primarily reflecting the S&S acquisition, as well as an increasehigher inventories, including work in business activity levels in the land-based market, partially offset by decreased business activity levels in the marine transportation segment. Other accounts receivable decreased 18%, primarily due to a decrease in insurance claim receivables. Inventoryprogress, in the distribution and services segment increased 74% reflectingoil and gas market due to the inventory acquired with the S&S acquisitionadoption of ASU 2014-09 and the building of inventories in the land-based market to meet current business activity levels, partially offset by lower inventory levels associated with the continued weak marine market.levels. Prepaid expenses and other current assets increased 4%36% primarily due to an increasea building acquired with the Higman acquisition being reclassified to assets held for sale, partially offset by the sale of marine vessels in prepaid insurancethe 2018 first nine months that were classified as assets held for sale in the 2017 fourth quarter. Trade accounts receivable decreased 11%, primarily reflecting decreased business activity levels in the distribution and services oil and gas market and lower revenue recognized due to the S&S acquisition.adoption of ASU 2014-09.
Property and equipment, net of accumulated depreciation, at September 30, 2017,2018 increased 6%20% compared with December 31, 2016.2017. The increase reflected $124,520,000$237,306,000 of capital expenditures for the 20172018 first nine months, more fully described under Capital Expenditures Reflected on the Balance Sheet below, and the fair value of the property and equipment acquired in acquisitionsthe Higman acquisition of $220,485,000,$480,451,000, the two inland pressure tank barges purchased in March 2018 of $10,400,000 and the fair value of the property acquired in the Targa acquisition of $42,134,000, less $141,116,000$155,656,000 of depreciation expense for the 2017 first nine months and $29,152,000$20,070,000 of property disposals during the 20172018 first nine months.
Goodwill as of September 30, 20172018 increased 54%3% compared with December 31, 2016,2017, predominantly reflecting the goodwill recorded in the S&S acquisitionHigman and Targa acquisitions.
Other intangibles, net, as of September 30, 2018 decreased 2% compared with December 31, 2017, reflecting intangible assets other than goodwill recorded in the barge fleeting and marine fueling operation business acquisition.Targa acquisition, less amortization of $14,851,000.
Other assets at September 30, 20172018 increased 114%14% compared with December 31, 2016,2017 primarily reflecting other assets acquired indue to the S&S acquisition, including intangible assets other than goodwill. The increase also reflected addition of deferred major maintenance dry-dock expenditures on ocean-going vessels, during the 2017 first nine months, net of amortization.amortization.
Current liabilities as of September 30, 20172018 increased 29%18% compared with December 31, 2016, primarily reflecting the current liabilities of S&S.2017. Accounts payable increased 59%13%, a reflection of the S&S acquisition, as well asprimarily due to increased business activity levels in the land-based market.distribution and services segment, the acquisition of Higman and higher accrued capital expenditures. Accrued liabilities increased 10%,13% primarily due to accrued liabilities assumed in the majority of which was attributable to the S&SHigman acquisition including an increase in taxes other than on income, primarily waterway use taxes and property taxes, and an increase in insurance claims payable, partially offset by a reduction in insurance claims payable.payments during the 2018 first nine months of employee incentive compensation accrued during 2017. Deferred revenues increased 12%57%, primarily reflecting the S&S acquisition, offset by decreased advanced billings in the land-based marketdistribution and services segment, reflecting changes in revenue recognition with the coastal marine transportation market.adoption of ASU 2014-09.
Long-term debt, less current portion, as of September 30, 20172018 increased 43%41% compared with December 31, 2016,2017, primarily reflecting the borrowingsissuance on February 12, 2018 of $500,000,000 under the Company’s Revolving Credit Facility in September 20172028 Notes to financefund the S&S acquisition of Higman, partially offset by payments of $88,392,000 on the revolving credit facilities during the 2018 first nine months. Net debt discount and the purchase in July 2017 of tank barges and towboats from an undisclosed competitor for $68,000,000. Net deferred debt issueissuance costs were $3,641,000$7,525,000 and $3,184,000$3,442,000 at September 30, 20172018 and December 31, 2016,2017, respectively. In addition, as a result of the S&S acquisition, the Company assumed $10,258,000 in long-term debt held by the seller.
Deferred income taxes as of September 30, 20172018 increased 7%16% compared with December 31, 2016. The increase2017, primarily reflectsreflecting $42,392,000 of deferred income taxes recorded with the 2017Higman acquisition and the 2018 first nine months deferred tax provision of $32,783,000 and an increase in deferred tax liabilities of $8,486,000 due to the adoption of ASU 2016-09 on January 1, 2017. The adoption reduced deferred tax assets by $8,486,000, which reflected the cumulative difference between the tax effect of stock-based compensation recognized for tax purposes and amounts recognized for financial reporting purposes, resulting in the recognition of a cumulative-effect adjustment to retained earnings of $8,486,000.$36,838,000.
Other long-term liabilities as of September 30, 2017 decreased 17%2018 increased 51% compared with December 31, 2016.2017. The decreaseincrease was primarily due to a reduction in the pension liability$11,100,000 of intangible liabilities related to a pension plan amendment on April 12, 2017 that loweredunfavorable contracts of the projected benefit obligation ofHigman acquisition and the pension plan by $33,433,000,liability assumed with the Higman acquisition of $34,726,000, partially offset by a $6,717,000 contribution to the accrual ofHigman pension expenseplan during the 20172018 first nine months.quarter.
Total equity as of September 30, 20172018 increased 19%4% compared with December 31, 2016.2017. The increase was primarily the result of $81,868,000$102,889,000 of net earnings attributable to Kirby for the first nine months of 2017,2018, an increase in accumulated other comprehensive income (“OCI”)additional paid-in capital of $15,229,000,$17,844,000, primarily due to the employee stock issued withaward plan amendment which resulted in shorter expense accrual periods on stock options and RSUs granted after February 19, 2018 to employees who are nearing retirement and meet certain years of service and age requirements, a fair value of $366,554,000 in connection with the S&S acquisition and a $6,925,000 decrease$7,294,000 increase in treasury stock partially offset by an $8,486,000and a $9,722,000 decrease in the opening balance of retained earnings due towith the adoption of ASU 2016-09. The increase in accumulated OCI primarily resulted from the decrease in unrecognized losses related to the Company’s defined benefit plans driven by the pension plan amendment on April 12, 2017. The decrease in treasury stock was due to the issuance of restricted stock and the exercise of stock options in connection with stock award plans.2014-09.
Long-Term Financing
On June 26, 2017,February 12, 2018, the Company entered intoissued $500,000,000 of 2028 Notes with U.S. Bank National Association, as trustee. Interest payments of $10,500,000 are due semi-annually on March 1 and September 1 of each year, with the exception of the first payment on September 1, 2018, which was $11,608,000. The Company received cash proceeds of $495,019,000, net of the original issue discount of $705,000 and debt issuance costs of $4,276,000. The 2028 Notes are unsecured and rank equally in right of payment with the Company’s other unsecured senior indebtedness. The 2028 Notes contain certain covenants on the part of the Company, including covenants relating to liens, sale-leasebacks, asset sales and mergers, among others. The 2028 Notes also specify certain events of default, upon the occurrence of which the maturity of the notes may be accelerated, including failure to pay principal and interest, violation of covenants or default on other indebtedness, among others. The Company used the proceeds from the issuance of the 2028 Notes to fund the acquisition of Higman. The remaining net proceeds of the sale of the 2028 Notes were used for the repayment of indebtedness under the Company’s bank credit facilities. As of September 30, 2018, the Company was in compliance with all the 2028 Notes covenants and had $500,000,000 outstanding under the 2028 Notes.
The Company has an amendment of its $850,000,000 unsecured revolving credit facility (“Revolving Credit FacilityFacility”) with a syndicate of banks, with JPMorgan Chase Bank, N.A. as the administrative agent bank, that increases the borrowing limit from $550,000,000 to $850,000,000 and extends thewith a maturity date toof June 26, 2022. In addition, the credit agreement allows for a $300,000,000 increase in the aggregate commitments of the banks in the form of revolving credit loans or term loans, subject to the consent of each bank that elects to participate in the increased commitment. The variable interest rate spread varies with the Company’s senior debt rating and, is currently 1.00%effective February 20, 2018, due to a change in one of the Company’s credit ratings, the spread over LIBOR or equalincreased from 1.00% to an1.125% and the Alternate Base Rate calculated with reference tospread is currently 0.125% over the agent bank’s prime rate, among other factors.rate. The commitment fee is currentlyincreased as well from 0.10% to 0.15%. The Revolving Credit Facility contains certain restrictive financial covenants including an interest coverage ratio and a debt-to-capitalization ratio. In addition to financial covenants, the Revolving Credit Facility contains covenants that, subject to exceptions, restrict debt incurrence, mergers and acquisitions, sales of assets, dividends and investments, liquidations and dissolutions, capital leases, transactions with affiliates and changes in lines of business. Borrowings under the Revolving Credit Facility may be used for general corporate purposes, the purchase of existing or new equipment, the purchase of the Company’s common stock, or for business acquisitions. The Company recognized additional interest expense of $187,000 in the 2017 second quarter due to the write-off of certain deferred issue costs in connection with the amendment of the Revolving Credit Facility. As of September 30, 2017,2018, the Company was in compliance with all Revolving Credit Facility covenants and had $524,410,000$406,948,000 of debt outstanding under the Revolving Credit Facility. The Revolving Credit Facility includes a $25,000,000 commitment which may be used for standby letters of credit. Outstanding letters of credit under the Revolving Credit Facility were $10,312,000$7,436,000 as of September 30, 2017.2018.
The Company has $500,000,000 of unsecured senior notes (“Senior Notes Series A” and “Senior Notes Series B”) with a group of institutional investors, consisting of $150,000,000 of 2.72% Senior Notes Series A due February 27, 2020 and $350,000,000 of 3.29% Senior Notes Series B due February 27, 2023. No principal payments are required until maturity. The Senior Notes Series A and Series B contain certain covenants on the part of the Company, including an interest coverage covenant, a debt-to-capitalization covenant and covenants relating to liens, asset sales and mergers, among others. The Senior Notes Series A and Series B also specify certain events of default, upon the occurrence of which the maturity of the notes may be accelerated, including failure to pay principal and interest, violation of covenants or default on other indebtedness, among others. As of September 30, 2017,2018, the Company was in compliance with all Senior Notes Series A and Series B covenants and had $150,000,000 of Senior Notes Series A outstanding and $350,000,000 of Senior Notes Series B outstanding.
The Company has a $10,000,000 line of credit (“Credit Line”) with Bank of America, N.A. (“Bank of America”) for short-term liquidity needs and letters of credit, with a maturity date of June 30, 2019. The Credit Line allows the Company to borrow at an interest rate agreed to by Bank of America and the Company at the time each borrowing is made or continued. The Company had no borrowings outstanding under the Credit Line as of September 30, 2017.2018. Outstanding letters of credit under the Credit Line were $1,247,000$1,201,000 as of September 30, 2017.
On September 13, 2017, as a result of the S&S acquisition, the Company assumed $12,135,000 of term debt. The term debt has a maturity date of September 15, 2032 and carries an interest rate of 4%. The term debt has quarterly interest payments plus quarterly principal payments of $375,000 due through December 2022 and $99,000 due thereafter through the maturity date. The term debt can be paid off prior to maturity without penalty. As of September 30, 2017, the term debt had $11,759,000 outstanding, of which $1,501,000 was classified as current portion of long-term debt.
The Company also had $899,000 of short-term secured loans outstanding, as of September 30, 2017, related to its South American operations.2018.
Capital Expenditures Reflected on the Balance Sheet
Capital expenditures for the 20172018 first nine months were $124,520,000,$237,306,000, including $8,449,000$19,111,000 for inland tank barge and towboat construction, $8,786,000 for progress payments on the construction of a 155,000 barrel coastal ATB placed in service in the 2017 third quarter, $15,404,000 for progress payments on the construction of two 4900 horsepower coastal tugboats, one completed in the 2017 second quarter and the second to be completed in the 2017 fourth quarter, $16,357,000$29,910,000 for progress payments on six 5000 horsepower coastal ATB tugboats, $698,000 in final costs$60,338,000 for the construction of a 35,000155,000 barrel coastal petrochemical tank barge,ATB under construction purchased from a competitor that is scheduled to be delivered in the 2018 fourth quarter, and $74,826,000$127,947,000 primarily for upgrading existing marine equipment and marine transportation and distribution and services facilities.
Financing of the construction of the inland tank bargesbarge and the towboat, the coastal ATB, thetowboats, coastal tugboats and the 155,000 barrel coastal petrochemical tank bargeATB, plus upgrades of existing marine equipment and marine transportation and distribution and services facilities was through operating cash flows and available credit under the Company’s Revolving Credit Facility.
During the 20172018 first nine months, the Company took delivery of fourone new inland tank barge with a capacity of approximately 29,000 barrels, acquired 161 inland tank barges with the Higman acquisition with a total capacity of approximately 4,714,000 barrels, acquired 16 pressure barges from Targa with a total capacity of approximately 258,000 barrels, acquired two inland tank barges with a total capacity of approximately 115,00035,000 barrels, acquired nine specialty pressuretook delivery of a new inland tank barges and four 30,000 barrel tank bargesbarge with a total capacity of 253,00026,000 barrels, which is being leased, and retired 4741 inland tank barges, reducing its capacity by approximately 913,000 barrels, brought one inland tank barge back into service with a capacity of 20,000 barrels and temporarily chartered one inland tank barge with a total capacity of approximately 11,000736,000 barrels. The net result was a reductionan increase of 28140 inland tank barges and approximately 514,0004,326,000 barrels of capacity during the first nine months of 2017.2018.
The Company projects that capital expenditures for 20172018 will be in the $175,000,000$275,000,000 to $185,000,000$290,000,000 range. The 20172018 construction program will consist of fiveone 30,000 barrel inland tank barges with a total capacity of 144,000 barrels and progress payments on 16 inland towboats of which one was delivered in the 2017 third quarter and 15 will be delivered in 2018 and 2019,barge, progress payments on the construction of a 155,000 barrel coastal ATB15 inland towboats, five of which will be placed in service in 2018 and the 2017 third quarter,remaining ten in 2019 and 2020, progress payments on the construction of two 4900 horsepower coastal tugboats and six 5000 horsepower coastal ATB tugboats, two of which were placed in service in the 2018 third quarter, one of which will be placed in service in the 2018 fourth quarter and final coststhree in 2019, and total payments on the construction of a 35,000155,000 barrel coastal petrochemical tank barge.ATB under construction that is scheduled to be delivered in the 2018 fourth quarter. Based on current commitments, steel prices and projected delivery schedules, the Company’s 20172018 payments on the new inland tank bargesbarge and the towboats will be approximately $17,000,000, 2017 progress payments on the construction of the 155,000 barrel coastal ATB will be approximately $9,000,000, 2017 progress payments on the construction of the two 4900 horsepower coastal tugboats will be approximately $17,000,000,$30,000,000, 2018 progress payments on the construction of the six 5000 horsepower coastal ATB tugboats will be approximately $26,000,000,$35,000,000 and final coststotal payments on the construction of the 35,000155,000 barrel coastal petrochemical tank bargeATB will be approximately $1,000,000. The balance of approximately $105,000,000$65,000,000. Approximately $135,000,000 to $115,000,000$145,000,000 is primarily capital upgrades and improvements to existing marine equipment and marine transportationfacilities. The balance of $10,000,000 to $15,000,000 will be for rental fleet growth, new machinery and equipment, and facilities improvements in the distribution and services facilities.segment.
Funding for future capital expenditures is expected to be provided through operating cash flows and available credit under the Company’s Revolving Credit Facility.
Treasury Stock Purchases
TheDuring October 2018, the Company did not purchase any treasurypurchased 11,000 shares of its common stock duringfor $776,000, for an average price of $69.61 per share pursuant to a stock trading plan entered into with a brokerage firm pursuant to Rule 10b5-1 under the first nine monthsSecurities Exchange Act of 2017.1934 (“Exchange Act”). As of November 7, 2017,2, 2018, the Company had approximately 1,411,0001,400,000 shares available under its existing repurchase authorization. Historically, treasury stock purchases have been financed through operating cash flows and borrowing under the Company’s Revolving Credit Facility. The Company is authorized to purchase its common stock on the New York Stock Exchange and in privately negotiated transactions. When purchasing its common stock, the Company is subject to price, trading volume and other market considerations. Shares purchased may be used for reissuance upon the exercise of stock options or the granting of other forms of incentive compensation, in future acquisitions for stock or for other appropriate corporate purposes.
Liquidity
The Company generated net cash provided by operating activities of $272,304,000 for the 2018 first nine months compared with $259,455,000 for the 2017 first nine months compared with $338,246,000 for the 2016 first nine months. The 20172018 first nine months experienced a net decrease in cash flows from changes in operating assets and liabilities of $28,592,000$66,707,000 compared with a net increasedecrease in the 20162017 first nine months of $11,048,000.$28,592,000. The net decrease in cash flows from the change in operating assets and liabilities was primarily due to higher inventories, including work in progress, in the distribution and services oil and gas market during the 2018 first nine months, primarily to support the increased business activity levels, partially offset by a decrease in trade receivables due to a decrease in revenues recognized in the distribution and services oil and gas market in the 2018 third quarter.
Funds generated from operations are available for acquisitions, capital expenditure projects, common stock repurchases, repayments of borrowings, and for other corporate and operating requirements. In addition to net cash flow provided by operating activities, the Company also had available as of November 7, 2017, $321,207,0002, 2018, $475,520,000 under its Revolving Credit Facility and $8,753,000$8,799,000 available under its Credit Line.
Neither the Company, nor any of its subsidiaries, is obligated on any debt instrument, swap agreement, or any other financial instrument or commercial contract which has a rating trigger, except for the pricing grid on its Revolving Credit Facility.
The Company expects to continue to fund expenditures for acquisitions, capital construction projects, common stock repurchases, repayment of borrowings, and for other operating requirements from a combination of available cash and cash equivalents, funds generated from operating activities and available financing arrangements.
The Revolving Credit Facility’s commitment is in the amount of $850,000,000 and expires June 26, 2022. As of September 30, 2018, the Company had $435,616,000 available under the Revolving Credit Facility. The Senior Notes Series A and Senior Notes Series B do not mature until February 27, 2020 and February 27, 2023, respectively, and require no prepayments. The 2028 Notes do not mature until March 1, 2028 and require no prepayments.
There are numerous factors that may negatively impact the Company’s cash flow in 2017.2018. For a list of significant risks and uncertainties that could impact cash flows, see Note 12,14, Contingencies, in the financial statements, and Item 1A — Risk Factors in this report, and Item 1A — Risk Factors and Note 13,14, Contingencies and Commitments, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017. Amounts available under the Company’s existing financial arrangements are subject to the Company continuing to meet the covenants of the credit facilities as described in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations under Long-Term Financing.
The Company has issued guaranties or obtained standby letters of credit and performance bonds supporting performance by the Company and its subsidiaries of contractual or contingent legal obligations of the Company and its subsidiaries incurred in the ordinary course of business. The aggregate notional value of these instruments is $30,466,000$23,719,000 at September 30, 2017,2018, including $11,829,000$8,857,000 in letters of credit and $18,637,000$14,862,000 in performance bonds. All of these instruments have an expiration date within three years. The Company does not believe demand for payment under these instruments is likely and expects no material cash outlays to occur in connection with these instruments.
All marine transportation term contracts contain fuel escalation clauses, or the customer pays for the fuel. However, there is generally a 30 to 90 day delay before contracts are adjusted depending on the specific contract. In general, the fuel escalation clauses are effective over the long-term in allowing the Company to recover changes in fuel costs due to fuel price changes. However, the short-term effectiveness of the fuel escalation clauses can be affected by a number of factors including, but not limited to, specific terms of the fuel escalation formulas, fuel price volatility, navigating conditions, tow sizes, trip routing, and the location of loading and discharge ports that may result in the Company over or under recovering its fuel costs. Spot contract rates generally reflect current fuel prices at the time the contract is signed but do not have escalators for fuel.
During the last three years, inflation has had a relatively minor effect on the financial results of the Company. The marine transportation segment has long-term contracts which generally contain cost escalation clauses whereby certain costs, including fuel as noted above, can be passed through to its customers. Spot contract rates include the cost of fuel and are subject to market volatility. The repair portion of the distribution and services segment is based on prevailing current market rates.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The Company is exposed to risk from changes in interest rates on certain of its outstanding debt. The outstanding loan balances under the Company’s bank credit facilities bear interest at variable rates based on prevailing short-term interest rates in the United States and Europe. A 10% change in variable interest rates would impact the 20172018 interest expense by $172,000$715,000 based on balances outstanding at December 31, 2016,2017, and would change the fair value of the Company’s debt by less than 1%.
| Item 4. | Controls and Procedures |
The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”))Act), as of September 30, 2017.2018, as required by Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of September 30, 2017,2018, the disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.forms and (ii) is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 20172018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company is in the process of integrating S&S and the Company's internal controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed.
PART II – OTHER INFORMATION
The Company has previously disclosed an incident involving the grounding on October 13, 2016 of the tug Nathan E. Stewart and the barge DBL 55 at the entrance to the Seaforth Channel on Atholone Island, British Columbia that resulted in a discharge of diesel fuel into the water. On October 10, 2018, the Heiltsuk First Nation filed a civil action in the Supreme Court of British Columbia, Vancouver Registry, against a subsidiary of the Company, the master and pilot of the tug, the vessels and the Canadian government seeking unquantified damages as a result of the incident. On the same date, the Canadian government filed charges in British Columbia Provincial Court (Vancouver) against the subsidiary and the vessels for violations of the Canadian Fisheries Act, the Migratory Birds Convention Act, the Pilotage Act and the Shipping Act of 2001. The Company is preparing its responses and is unable to estimate the potential exposure in either proceeding. The Company has various insurance policies covering liabilities including pollution, property, marine and general liability and believes that it has satisfactory insurance coverage for the cost of cleanup and salvage operations as well as other potential liabilities arising from the incident. The Company believes it has accrued adequate reserves for the incident and does not expect the incident to have a material adverse effect on its business or financial condition.
The Company continues to be subject to the risk factors previously disclosed in its “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
| – | 2005 Stock and Incentive Plan | |
| – | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) | – | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) |
| – | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) | – | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) |
| – | Certification Pursuant to 18 U.S.C. Section 1350 | – | Certification Pursuant to 18 U.S.C. Section 1350 |
| 101.INS* | – | XBRL Instance Document | – | XBRL Instance Document |
| 101.SCH* | – | XBRL Taxonomy Extension Schema Document | – | XBRL Taxonomy Extension Schema Document |
| 101.CAL* | – | XBRL Taxonomy Extension Calculation Linkbase Document | – | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | – | XBRL Taxonomy Extension Definition Linkbase Document | – | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB* | – | XBRL Taxonomy Extension Label Linkbase Document | – | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | – | XBRL Taxonomy Extension Presentation Linkbase Document | – | XBRL Taxonomy Extension Presentation Linkbase Document |
| * | These exhibits are furnished herewith. In accordance with Rule 406T of Regulation S-T, these exhibits are not deemed to be filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
† | Management contract, compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | KIRBY CORPORATION |
| | (Registrant) |
| | | |
| | By: | /s/ David W. GrzebinskiWILLIAM G. HARVEY |
| | | David W. GrzebinskiWilliam G. Harvey |
| | | President, Chief Executive OfficerVice President and |
| | | Chief Financial Officer |
| | |
Dated: November 8, 2017 | | |