The Company’s operations are aggregated into two reportable business segments as follows:
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 $8,150,000$7,535,000 and $5,430,000$8,150,000 for the three months ended March 31, 20182019 and 2017,2018, respectively, as well as the related intersegment profit of $815,000$754,000 and $543,000$815,000 for the three months ending March 31, 20182019 and 2017,2018, respectively, have been eliminated from the tables below.
The following table presents the details of “Other” segment loss for the three months ended March 31, 20182019 and 20172018 (in thousands):
The following table presents the details of “Other” total assets as of March 31, 20182019 and December 31, 20172018 (in thousands):
Earnings before taxes on income and details of the provision for taxes on income for the three months ended March 31, 20182019 and 20172018 were as follows (in thousands):
The following table presents the components of basic and diluted earnings per share for the three months ended March 31, 20182019 and 20172018 (in thousands, except per share amounts):
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 itsthe Kirby pension plan during 2018.2019.
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 ended March 31, 20182019 and 20172018 were as follows (in thousands):
The components of net periodic benefit cost for the Company’s postretirement benefit plan for the three months ended March 31, 20182019 and 20172018 were as follows (in thousands):
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.
In addition, the Company is 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 financial condition, results of operations or 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 $20,348,000$19,525,000 at March 31, 2018,2019, including $9,442,000$7,791,000 in letters of credit and $10,906,000$11,734,000 in performance bonds. All of these instruments have an expiration date within threetwo 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.
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”“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, tornadoes,tornados, 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, 2017.2018. 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 first quarterquarters of 2019 and 2018 were 59,893,000 and 2017 were 59,493,000, and 53,609,000, respectively. The increase in the weighted average number of common shares for the 20182019 first quarter compared with the 20172018 first quarter primarily reflected the issuance of 5,696,259 sharesrestricted stock, the issuance of common stock associated withfor the acquisitionvesting of Stewart & Stevenson LLC (“S&S”) on September 13, 2017, and the issuance of restricted stockRSUs and the exercise of stock options.
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 March 31, 2018,2019, the Company operated a fleet of 9931,061 inland tank barges with 21.923.6 million barrels of capacity, and operated an average of 262286 inland towboats. The Company’s coastal fleet consisted of 5551 tank barges with 5.24.9 million barrels of capacity and 5047 coastal tugboats. The Company also owns and operates fivefour offshore dry-bulk cargo barges, fivefour offshore tugboats and one docking tugboat transporting dry-bulk commodities 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 oilfield service and oil and gas operator and producer markets.
Tank barge utilization levels ofin the Company’s inland marine transportation markets wereaveraged in the mid-90% range during the 20182019 first quarter compared with the low to mid-90% range during the 20172018 fourth quarter and high 80% to low 90%mid-90% range during the 20172018 first quarter. Increased customerStrong demand and poor seasonal operating conditions contributed to a tight market across the entire inland tank barge industry. Demand for tank barges movingfrom petrochemicals, black oil, refined petroleum products and agricultural chemicals was stable, while demand for black oil and refined products was highercustomers, along with extensive delay days due to poor operating conditions which slowed the transport of customer cargoes, contributed to increased utilization during the 2019 first quarter compared to demand in the 2017 first2018 fourth quarter.
Coastal tank barge utilization levels were in the low 80% range during the 2019 first quarter compared with the high 70% range during the 2018 first quarter compared with low to mid-60% range during the 2017 fourth quarter and mid-70% to low 80% range duringin the 2017 first2018 fourth quarter. The improvement in utilization in 2018 and 2019 primarily reflected improved customer demand and the impairment and retirement of 12 out-of-service coastal barges during the 2017 fourth quarter. Utilization in the coastal marine fleet continued to be impacted by the oversupply of tank barges in the coastal industry. Demand for the coastal transportation of petrochemicals was stable, while demand for the transportation of black oil and refined products was lower compared with the 2017 first quarter.
During the 20182019 and 20172018 first quarters, approximately 70%65% and 75%70%, respectively, of marine transportation’s inland revenues were under term contracts and 30%35% and 25%30%, respectively, were spot contract revenues. Inland time charters during the 2019 first quarter represented 58%62% of the inland revenues under term contracts duringcompared with 58% in the 2018 first quarter compared with 48% during the 2017 first quarter. Rates on inland term contracts renewed in the 20182019 first quarter decreasedincreased in the 4% to 6% average range compared with term contracts renewed in the first quarter of 2017. However, spot2018. Spot contract rates which includein the cost of fuel,2019 first quarter increased in the 10%5% to 15%8% average range compared with bothto the 20172018 fourth quarter and increased approximately 20% compared to the 2018 first and fourth quarters.quarter. Effective January 1, 2018,2019, 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%1.7%, excluding fuel.
During the 20182019 and 20172018 first quarters, 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 20182019 and 20172018 first quarters. TermSpot and spotterm contract pricing for the 2018 first quarter were stable compared with pricing for the 2017 fourth quarter. Compared with the 2017 first quarter, pricing declined in the 10% to 15% range,coastal market are contingent on various factors including geographic location, vessel capacity, vessel type and product serviced. Spot market rates in the 2019 first quarter improved in the 10% to 15% average range compared to the 2018 first quarter and in the 4% to 6% average range compared to the 2018 fourth quarter. Term contract pricing in the 2019 first quarter was higher in the 4% to 6% average range compared to the 2018 first quarter.
The marine transportation segment operating margin was 9.6% for the 2019 first quarter compared with 4.8% for the 2018 first quarter compared with 10.4% for the 2017 first quarter.
Distribution and Services
For the 20182019 first quarter, the distribution and services segment generated 54%51% of the Company’s revenue, of which 38%67% was generated from overhaulsservice and service, 35% from direct parts sales and 27%33% from manufacturing. The results of the distribution and services segment are largely influenced by the economic cycles of the 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 20182019 first quarter increased 171% and operating income increased 170%decreased 6% when compared with the 20172018 first quarter. The higherdecreased revenues and operating income were primarily attributable to reduced activity in the acquisition of S&S, completed on September 13, 2017, as well as acceleratedoilfield which resulted in lower customer demand for new and overhauled transmissions and related parts and service and reduced demand for new pressure pumping equipment, partially offset by increased service for pressure pumping unit remanufacturing, and improved demand in the commercial and industrial market for the marine diesel engine repair business and power generation sector. Operating income for the distribution and services segment for the 2019 first quarter increased 2% compared with the 2018 first quarter. The increase primarily reflected increased deliveries of oilfield equipment at favorable margins and improved demand in the marine diesel engine repair business and the power generation sector. For the 2019 first quarter, the oil and gas market forcontributed 59% of the remanufacture of pressure pumping unitsdistribution and transmission overhauls,services revenues. In the manufacturing of oilfield service equipment, including pressure pumping units,commercial and for the sale and distribution of engines, transmissions and related parts. The oil and gasindustrial market, which contributed 68%41% of the distribution and services revenues for the 2018 first quarter. However, the strong demand challenged the Company’s vendor supply chain, 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. In the commercial and industrial market, which contributed 32% of the distribution and services revenues for the 20182019 first quarter, the marine sectormarket experienced highercontinued improved demand for diesel engines, parts and service levelsin the Gulf Coast, Midwest and Florida. The power generation market saw increased demand from commercial customers for medium-speed diesel engine overhauls and related parts sales throughoutback-up power systems in the 2019 first quarter. Demand in the nuclear power generation market was stable compared to the 2018 first quarter. The power generation sector saw higher demand from nuclear and commercial customers, but a seasonal decline in the rental of stand-by power generators following the significant hurricane related demand in the 2017 fourth quarter.
The distribution and services segment operating margin for the 20182019 first quarter was 9.2%10.0% compared with 9.3%9.2% for the 20172018 first quarter.
Cash Flow and Capital Expenditures
NetThe Company continued to generate favorable operating cash flow during the 2019 first quarter with net cash provided by operating activities of $38,529,000 compared with $18,734,000 for the 2018 first quarter, a 106% increase. The improvement was $18,734,000 compared with $85,202,000 fordriven by increased revenues and operating income in the 2017 first quarter, a 78% decrease, primarilymarine transportation segment driven by the Higman acquisition in February 2018, the Targa acquisition in May 2018 and the CGBM acquisition in December 2018, as well as improved inland barge pricing. The improvement was also due to an $87,926,000a net decreaseincrease in cash flows resulting from changesthe change in operating assets and liabilities for the 2018 first quarter. The netof $6,189,000 due to decrease in operating assets and liabilities was primarily due to an increase in trade receivables from strong 2018 first quarter revenues and increased billingsinventories in the distribution and services segment and higher inventories in the distribution and services2019 first quarter compared to an increase in the 2018 first quarter. The decrease in the 2019 first quarter was primarily due to reduced inventory levels to support reduced activity levels in the oil and gas market primarilyas compared to higher inventory levels in the 2018 first quarter to support the increased business activity levels. In addition, during the 20182019 and 20172018 first quarters, the Company generated cash of $12,181,000$13,187,000 and $7,958,000,$12,181,000, respectively, from proceeds from the disposition of assets, and $292,000$1,415,000 and $1,258,000,$292,000, respectively, from proceeds from the exercise of stock options.
For the 20182019 first quarter, cash generated and borrowings under the Company’s revolving credit facility were used for capital expenditures of $40,961,000,$60,932,000, including $4,728,000$7,937,000 for inland tank barge and towboat construction, $6,710,000$6,904,000 for progress payments on sixthree 5000 horsepower coastal ATB tugboats, $29,523,000$1,838,000 for final costs on a 155,000 barrel coastal ATB under construction purchased from another operator that was delivered to the Company in the 2018 fourth quarter, $44,253,000 primarily for upgrading existing marine equipment and marine transportation and distribution and services facilities, and $429,977,000facilities. The Company also used $247,470,000 for acquisitions of businesses and marine equipment.
The Company’s debt-to-capitalization ratio increased to 31.2%33.8% at March 31, 20182019 from 24.2%30.5% at December 31, 2017,2018, primarily due to borrowings under the 2028 NotesRevolving Credit Facility and the Term Loan to purchase Higman, lessthe Cenac fleet in the 2019 first quarter, offset by the increase in total equity from net earnings attributable to Kirby for the 20182019 first quarter of $32,471,000$44,296,000 and the exercise of stock options, the issuance of stock for RSU vestings and the amortization of unearned equity compensation. As of March 31, 2018,2019, the Company had $423,085,000$176,574,000 outstanding under its Revolving Credit Facility, $8,321,000$500,000,000 outstanding under its Credit Line,the Term Loan, $500,000,000 of unsecured senior notes (“Senior Notes Series A” and “Senior Notes Series B”) outstanding and $500,000,000 of the4.2% senior unsecured notes due March 1, 2028 Notes(the “2028 Notes”) outstanding, offset by $8,139,000$9,117,000 in unamortized debt discount and issuance costs.
During the 20182019 first quarter, the Company took delivery of one new inland tank barge with a capacity of approximately 29,000 barrels, acquired 16163 inland tank barges with the Higman acquisitionfrom Cenac with a total capacity of approximately 4,750,000 barrels, acquired two inland tank barges with a total capacity of approximately 35,0001,833,000 barrels and retired 12five inland tank barges, reducing its capacity by approximately 179,00091,000 barrels. The net result was an increase of 15258 inland tank barges and approximately 4,635,0001,742,000 barrels of capacity during the first quarter of 2018.2019.
The Company projects that capital expenditures for 20182019 will be in the $200,000,000$225,000,000 to $225,000,000$245,000,000 range. The 20182019 construction program will consist of one 30,000 barrel inland tank barge, progress payments on the construction of 1513 inland towboats, fiveeight of which will be placed in service in 20182019 and the remaining tenfive in 20192020 and 2020,2021, and progress payments on the construction of sixthree 5000 horsepower coastal ATB tugboats three of which willto be placed in service in 2018 and three in 2019. Based on current commitments, steel prices and projected delivery schedules, the Company’s 20182019 progress payments on the new inland tank barge and towboats will be approximately $35,000,000$25,000,000 and 20182019 progress payments on the construction of the sixthree 5000 horsepower coastal ATB tugboats will be approximately $40,000,000.$20,000,000. Approximately $100,000,000$155,000,000 to $120,000,000$165,000,000 is primarily capital upgrades and improvements to existing marine equipment and facilities. The balance of $25,000,000 to $30,000,000$35,000,000 will be for rental fleet growth, new machinery and equipment, and facilities improvements in the distribution and services segment.
Outlook
ReducedIn the inland marine transportation market, the Company anticipates favorable market dynamics with continued growth in customer demand during 2019, driven by continued growth in U.S. GDP, new petrochemical plants which are expected to come on-line during the year, and new pipelines from the Permian Basin that will bring additional crude oil volumes to be moved by tankthe Gulf Coast. These factors, combined with only modest inland barge dueadditions, are expected to a declineresult in oil prices, a decline in domestic drilling and additional pipeline capacity, coupled with the large number of inland tank barges built during 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, 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 throughout 2016, 2017 and the 2018 first quarter.
However, with continued industry-wide inland tank barge retirements, minimal new inland tank barge construction and higher customer demand, the result of increased production from current facilities, plant expansions and the opening of new facilities, inland utilization is anticipated to be in the low to mid-90% range for 2018. With utilization in the inland market in the mid-90% levelrange during the year. Together with a full year of contribution from 2018 first quarter, which ledacquisitions, including Higman, Targa’s pressure barge business and CGBM’s tank barges, as well as the acquisition in March 2019 of Cenac’s marine transportation fleet, inland revenues and operating income are expected to improved spot contract pricingincrease during the quarter, the Company anticipates a modest mid-single digit pricing improvement on term contracts renewed in the 2018 second half.2019.
As of March 31, 2018,2019, the Company estimated there were approximately 3,800 inland tank barges in the industry fleet, of which approximately 400 were over 30 years old and approximately 250240 of those over 40 years old. Given the age profile of the industry inland tank barge fleet, the expectation is that many older tank barges will be removed from service during 2018. The Company estimates that approximately 40190 tank barges werehave been ordered during 2017 for delivery throughout 2018, three of which are for the Company,2019 and many older tank barges, including an expected 28nine by the Company, will be retired, dependent on 20182019 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 revenues and operating income to improve as compared to 2018, with coastal tank barge utilization increasing modestly into the low to mid-80% range for 2019. Improving market conditions are expected to be in the high 70%driven by stable to slightly improving customer demand and expected additional industry retirements of aging barges due to BWMS regulations. The Company expects pricing to increase modestly with low 80% range for the balance of 2018, with a stabilized pricing environmentto mid-single digit improvement on most renewing term contracts and no material change inspot market fundamentals.rates as industry utilization improves.
As of March 31, 2018,2019, the Company estimated there were approximately 290 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 2015 of those were over 30 years old. The Company is aware of sixthree announced coastal tank barge and tugboat units in the 195,000 barrel or less category under construction by competitors for delivery in 20182019, and 2019.two coastal tank barge and tugboat units greater than 195,000 barrels under construction for delivery in 2020.
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. During 2015
Recent oilfield activity declines and 2016, lower crude oil prices resulted in a decreaseprice volatility in the number of2018 fourth quarter have created some uncertainty for the Company’s oil and gas wells being drilled. Oilfield service companies reduced their capital spending, resultingbusinesses which could extend for the duration of 2019. These market dynamics have resulted in decreased demandlower sales of new engines, transmissions and associated parts thus far in 2019 and will likely continue until oilfield activity improves. In manufacturing, the orders for new parts and equipment, including pressure pumping units, provided by the distribution and 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 improved in 2017 and the 2018 first quarter from the lows in 2016, oil prices traded in the $40 to $65 per barrel range, and service intensity in the well completion business increased. In 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 anticipates the trend to continue throughout 2018 for the strong demand for pressure pumping unit remanufacturing and the increased demand is anticipated to generate orders for the manufacture ofremanufactured pressure pumping units and ancillary oilfield service support equipment. These positive conditionsequipment also slowed during the 2019 first quarter. Additionally, a number of new pressure pumping units which were expected to be delivered in the 2019 second quarter are likely to be delayed into the 2019 third quarter. As a result, revenues and the acquisition of S&Soperating income are expected to result in increased revenues and profitsdecline in the distribution and services oil and gas market2019 second quarter compared to the 2019 first quarter. The manufacturing outlook for the 2018 year.second half of 2019 will be dependent on additional orders for new and remanufactured pressure pumping equipment and oilfield equipment for international markets.
For the distribution and services commercial and industrial market, the Company anticipates an improved marine market for 2018 as the inland tank barge industry improves,revenues and maintenance deferrals implemented by inland and coastal marine transportation customers for much of 2017 are no longer sustainable and should leadoperating income to increase in 2019 with higher anticipated demand for overhauls, new enginesstandby power generation and parts sales as 2018 progresses. Thespecialty equipment rentals. Activity in the nuclear standby power generation market should remain stable, benefiting from engine-generator set upgrades and parts sales for both domestic and international customers, customized power generation systems, and the rental of generators.commercial marine markets is expected to be stable in 2019.
Acquisitions
On March 15, 2018,29, 2019, the Company purchased twothree inland pressure tank barges from a competitorleasing company for $10,400,000$2,970,000 in cash. The Company had been leasing the barges prior to the purchase. Financing of the equipment acquisition was through borrowings under the Company’s revolving credit facility.
On FebruaryMarch 14, 2018,2019, the Company completed the acquisition of Higmanthe marine transportation fleet of Cenac for $421,922,000$244,500,000 in cash, subject to certain post-closing adjustments. Higman’scash. Cenac’s fleet consisted of 16363 inland 30,000 barrel tank barges of which two are under construction and scheduled to be delivered in May 2018 and October 2018, with 4.8 millionapproximately 1,833,000 barrels of capacity, and 7534 inland towboats transportingand two offshore tugboats. Cenac transported petrochemicals, refined products and black oil, including crude oil, residual fuels, feedstocks and natural gas condensate, and refined petroleum productslubricants on the lower Mississippi River, Systemits tributaries, and the Gulf Intracoastal Waterway.Waterway for major oil companies and refiners. The average age of the inland tank barges was approximately five years and the inland towboats had an average age of approximately seven years. Financing of the acquisition was through borrowings under the issuance of $500,000,000 of 4.2% senior unsecured notes due March 1, 2028. The notes were issued on February 12, 2018 in preparation for closing of the acquisition.Company’s revolving credit facility.
Results of Operations
The Company reported 2019 first quarter net earnings attributable to Kirby of $44,296,000, or $0.74 per share, on revenues of $744,621,000, compared with 2018 first quarter net earnings attributable to Kirby of $32,471,000, or $0.54 per share, on revenues of $741,688,000, compared with 2017 first quarter net earnings attributable to Kirby of $27,483,000, or $0.51 per share, on revenues of $491,705,000.$741,688,000. The 2018 first quarter results reflectreflected the acquisition of Higman on February 14, 2018 and included $3,261,000 before taxes, or $.04$0.04 per share, of one-time transaction costs associated with the acquisition, as well as $2,912,000 before taxes, or $.04$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 Company incurred2018 first quarter included $3,938,000 before taxes, or $.05$0.05 per share, of non-cash expenses related to an amendment to the employee stock award plan during the 2018 first quarter.plan. The result of the amendment is 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.
Marine transportation revenues for the 20182019 first quarter were $368,121,000, or 49% of total revenues, compared with $340,403,000, or 46% of total revenues, compared with $343,652,000, or 70% of total revenues, for the 20172018 first quarter. Distribution and services revenues for the 20182019 first quarter were $376,500,000, or 51% of total revenues, compared with $401,285,000, or 54% of total revenues, compared with $148,053,000, or 30% of total revenues, for the 20172018 first quarter.
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 March 31, 2018,2019, the Company operated 1,061 inland tank barges, including 28 leased barges, with a total capacity of 23.6 million barrels. This compares with 993 inland tank barges operated as of March 31, 2018, including 31 leased barges, with a total capacity of 21.9 million barrels. This compares with 864 inland tank barges operated as of March 31, 2017, including 37 leased barges, with a total capacity of 17.6 million barrels. The Company operated an average of 262286 inland towboats during the 2019 first quarter, of which an average of 81 were chartered, compared with 262 during the 2018 first quarter, of which an average of 77 were chartered, compared with 235 during the 2017 first quarter, of which an average of 72 were chartered. The Company’s coastal tank barge fleet as of March 31, 2018,2019, consisted of 5551 tank barges, three of which were leased, with 4.9 million barrels of capacity, and 47 tugboats, four of which were chartered. This compares with 55 coastal tank barges operated as of March 31, 2018, seven of which were leased, with 5.2 million barrels of capacity, and 50 tugboats, four of which were chartered. This compares with 68 coastal tank barges operated as of March 31, 2017, seven of which were leased, with 6.1 million barrels of capacity, and 71 tugboats, five of which were chartered. The Company owns and operates fivefour offshore dry-bulk cargo bargesbarge and five offshore tugboatstugboat units 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 ended March 31, 20182019 compared with the three months ended March 31, 20172018 (dollars in thousands):
| | | Three months ended March 31, | | | | | | Three months ended March 31, | | | | |
| | | 2018 | | | 2017 | | | % Change | | | 2019 | | | 2018 | | | % Change | |
| Marine transportation revenues | | $ | 340,403 | | | $ | 343,652 | | | | (1 | )% | | $ | 368,121 | | | $ | 340,403 | | | | 8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs of sales and operating expenses | | | 238,785 | | | | 229,620 | | | | 4 | | | | 246,190 | | | | 238,785 | | | | 3 | |
| Selling, general and administrative | | | 35,576 | | | | 27,878 | | | | 28 | | | | 33,217 | | | | 35,576 | | | | (7 | ) |
| Taxes, other than on income | | | 6,522 | | | | 6,098 | | | | 7 | | | | 7,966 | | | | 6,522 | | | | 22 | |
| Depreciation and amortization | | | 43,340 | | | | 44,288 | | | | (2 | ) | | | 45,324 | | | | 43,340 | | | | 5 | |
| | | | 324,223 | | | | 307,844 | | | | 5 | | | | 332,697 | | | | 324,223 | | | | 3 | |
| Operating income | | $ | 16,180 | | | $ | 35,768 | | | | (55 | )% | | $ | 35,424 | | | $ | 16,180 | | | | 119 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating margins | | | 4.8 | % | | | 10.4 | % | | | | | | | 9.6 | % | | | 4.8 | % | | | | |
Marine Transportation Revenues
The following table shows the marine transportation markets serviced by the Company, the marine transportation revenue distribution for the first quarter of 2018,2019, products moved and the drivers of the demand for the products the Company transports:
| Markets Serviced | | 20182019 First
Quarter Revenue Distribution | | Products Moved | | Drivers |
| Petrochemicals | | 55% | 56% |
| Benzene, Styrene, Methanol, Acrylonitrile, Xylene, Naphtha, Caustic Soda, Butadiene, Propylene | | Consumer non-durables — 70%, Consumer durables — 30% |
| | | | | | | | |
| Black Oil | | 21% | 22% |
| 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 | | 20% | 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 |
Marine transportation revenues for the 20182019 first quarter decreased 1%increased 8% when compared with the 20172018 first quarter,quarter. The increase was primarily due to lower term contract pricing in both the inland and coastal markets and lower coastal spot contract pricing, partially offset by improved utilization in the inland market and the revenue contribution fromaddition of the Higman fleet acquired on February 14, 2018. Poor seasonal weather2018, the Targa pressure barges acquired on May 10, 2018 and the CGBM inland tank barges acquired on December 14, 2018, and improved barge utilization and spot and term contract pricing in the inland and coastal markets. Partially offsetting the increase were unusually poor operating conditions due to heavy fog along the Gulf Coast, prolonged periods of ice on the Illinois River, high water on the Mississippi River, closures of key waterways as a result of lock maintenance projects and favorable prices for customer’sa fire at a chemical storage facility on the Houston Ship Channel, and increased shipyard days on several large capacity coastal vessels. For the 2019 and 2018 first quarters, the inland tank barge fleet contributed 77% and 74%, respectively, and the coastal fleet contributed 23% and 26%, respectively, of marine transportation revenues.
Tank barge utilization levels in the Company’s inland marine transportation markets averaged in the mid-90% range during the 2019 first quarter compared with the low to mid-90% range during the 2018 fourth quarter and mid-90% range during the 2018 first quarter. Strong demand from petrochemicals, black oil, refined petroleum products and agricultural chemicals customers, along with extensive delay days due to poor operating conditions which slowed the transport of customer cargoes, contributed to increased utilization during the 2019 first quarter compared to the 2018 fourth quarter.
Coastal tank barge utilization levels were in the low 80% range during the 2019 first quarter compared with the high 70% range during the 2018 first quarter and corresponding higher spot market pricing. Demandthe 80% range in the 2018 fourth quarter. The improvement in utilization in 2018 and 2019 primarily reflected improved customer demand and the impairment and retirement of 12 out-of-service coastal barges during the 2017 fourth quarter. Utilization in the coastal marketsmarine fleet continued to be impacted by the oversupply of tank barges in the coastal industry. For the 2018 and 2017 first quarters, the inland tank barge fleet contributed 74% and 69%, respectively, and the coastal fleet 26% and 31%, respectively, of marine transportation revenues. Tank barge utilization levels of the Company’s inland marine transportation markets improved to the mid-90% range during the 2018 first quarter compared to the low to mid-90% range during the 2017 fourth quarter and the high 80% to low 90% range for the 2017 first quarter. Coastal tank barge utilization levels improved to the high 70% range during the 2018 first quarter compared to the low to mid-60% range during the 2017 fourth quarter and the mid-70% to low 80% range in the 2017 first quarter. The coastal improvement was primarily due to the impairment and retirement of 12 coastal tank barges in the 2017 fourth quarter.
The petrochemical market, the Company’s largest market, contributed 55%56% of marine transportation revenues for the 20182019 first quarter, reflecting continued stable volumes from Gulf Coast petrochemical plants for both domestic consumption and to terminals for export destinations andplus the addition of tankthe Targa pressure barges acquired in the 2017 second half.May 2018. 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 20172018 and the 20182019 first quarter benefited the segment.market.
The black oil market, which contributed 21%22% of marine transportation revenues for the 20182019 first quarter, reflected higher revenues incontinued stable demand from steady refinery production levels and the inland market primarily due to the additionexport of the Higman fleet.refined petroleum products and fuel oils. 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 transportequipment. Additionally, the Company transported increased volumes of Utica natural gas condensate downriver from the Mid-Atlantic to the Gulf Coast. Revenues forCoast and Canadian and Bakken crude downriver from the transportation of black oil products in the coastal market during the 2018 first quarter were lower compared with the 2017 first quarter dueMidwest to the continued industry-wide over supply of tank barges in the coastal industry.
The refined petroleum products market, which contributed 20%19% of marine transportation revenues for the 20182019 first quarter reflected strongerstable volumes in the inland market, primarily due to the addition of the Higman fleet, partially offset by lower utilization in the coastal market, primarily a result of the oversupply of coastal tank barge capacity.
The agricultural chemical market, which contributed 4%3% of marine transportation revenues for the 20182019 first quarter, saw typical seasonal demand for transportation of both domestically produced and imported products during the quarter.
For the first quarter of 2018,2019, the inland operations incurred 3,1824,613 delay days, 40%82% more than the 2,2672,528 delay days that occurred during the 20172018 first quarter and 61%42% more than the 1,9783,249 delay days that occurred during the 20172018 fourth quarter. 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. OperatingThe increase in delay days for the 2019 first quarter compared to the 2018 first and fourth quarters reflected unusually poor operating conditions during the 20182019 first quarter were challenged bydue to heavy fog along the Gulf Coast, extended periods of ice on the Illinois River, near record high water conditions on the OhioMississippi River, and Mississippi Rivers,closures of key waterways as a result of lock maintenance projects and continued infrastructure issuesa fire at a chemical storage facility on the Ohio River. Seasonal fog and high winds, as well as lock delays along the Gulf Intracoastal Waterway, also increased delay days. These conditions challenged inland operations for much of the 2018 first quarter.Houston Ship Channel.
During the 20182019 and 20172018 first quarters, approximately 70%65% and 75%70%, respectively, of marine transportation’s inland revenues were under term contracts and 30%35% and 25%30%, respectively, were spot contract revenues. Inland time charters during the 2019 first quarter represented 58%62% of the inland revenues under term contracts duringcompared with 58% in the 2018 first quarter compared with 48% duringquarter. Rates on inland term contracts renewed in the 2017 first quarter. The 10% increase in inland time charters was primarily due to the acquisition of Higman. Inland term contract pricing was at lower levels relative to the 20172019 first quarter as contracts renewed at lower levels throughout 2017. Contracts that renewed during the 2018 first quarter decreasedincreased in the 4% to 6% average range compared with term contracts renewed in the 2017 first quarter. With utilizationquarter of 2018. Spot contract rates in the mid-90% level for both2019 first quarter increased in the Company5% to 8% average range compared to the 2018 fourth quarter and the industry duringincreased approximately 20% compared to the 2018 first quarter, spot contract rates, which include the cost of fuel, increased in the 10% to 15% range compared with both the 2017 first and fourth quarters.quarter. Effective January 1, 2018,2019, 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%1.7%, excluding fuel.
During the 20182019 and 20172018 first quarters, 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 20182019 and 20172018 first quarters. TermSpot and spotterm contract pricing for the 2018 first quarter were stable compared with pricing for the 2017 fourth quarter. Compared with the 2017 first quarter, pricing declined in the 10% to 15% range,coastal market are contingent on various factors including geographic location, vessel capacity, vessel type and product serviced. Spot market rates in the 2019 first quarter improved in the 10% to 15% average range compared to the 2018 first quarter and in the 4% to 6% average range compared to the 2018 fourth quarter. Term contract pricing in the 2019 first quarter was higher in the 4% to 6% average range compared to the 2018 first quarter.
Marine Transportation Costs and Expenses
Costs and expenses for the 20182019 first quarter increased 5%3% when compared with the 20172018 first quarter. Costs of sales and operating expenses increased 4% for the 20182019 first quarter increased 3% compared with the 20172018 first quarter, primarily due to the addition of the Higman fleet of inland tank barges and towboats in February 2018 and higher fuel costs.2018.
The inland marine transportation fleet operated an average of 286 towboats during the 2019 first quarter, of which an average of 81 were chartered, compared with 262 towboats during the 2018 first quarter, of which an average of 77 were chartered, compared with 235 during the 2017 first quarter, of which an average of 72 were chartered. The increase was primarily due to the addition of 75 inland towboats with the Higman acquisition on February 14, 2018.2018 and, to a lesser extent, the Cenac inland towboats acquired on March 14, 2019. 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 ice on the Illinois River, high water on the Ohio and Mississippi Rivers, infrastructure issues on the Ohio River, and seasonal high winds and heavy fog conditions along the Gulf Intracoastal Waterway that occurred in the 2018 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 20182019 first quarter, the inland operations consumed 11.311.4 million gallons of diesel fuel compared to 10.611.3 million gallons consumed during the 20172018 first quarter. The average price per gallon of diesel fuel consumed during the 20182019 first quarter was $2.04$1.93 per gallon compared with $1.78$2.04 per gallon for the 20172018 first quarter. 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 20182019 first quarter increased 28%decreased 7% compared with the 20172018 first quarter. The increase includeddecrease was primarily due to transactions costs of $3,261,000, of transaction costs, consisting primarily of legal, audit and other professional fees associated with the Higman acquisition and severance charges of $2,591,000 associated with the integration of Higman into the Company and further reduction in headcount in the coastal sector in order to manage costs, both of which were incurred in the 2018 first quarter. The Company also experienced higher costs in the 2019 first quarter due to Cenac acquisition related costs of $247,000 and $2,378,000salaries and related costs of non-cash expenses related to the amendmentacquired personnel of the employee stock award plan.Higman.
Taxes, other than on income, for the 20182019 first quarter increased 7%22% compared with the 20172018 first quarter, mainly due to higher property taxes on marine transportation equipment, including the Higman, fleet.Targa and CGBM fleets, and higher waterway use taxes 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 20182019 first quarter decreased 55%increased 119% compared with the 20172018 first quarter. The 20182019 first quarter operating margin was 4.8%9.6% compared with 10.4%4.8% for the 20172018 first quarter. The resultsoperating income increase in the 2019 first quarter, compared to the 2018 first quarter, was primarily reflected lowerdue to the acquisitions of Higman, Targa’s pressure barge fleet and CGBM’s inland tank barges, improved barge utilization and spot and term contract pricing in both the inland and coastal markets, and lower coastal spot contract pricing, more coastal equipment operatingcost reductions in the spotcoastal market which adds increased idle timeimplemented during 2018, partially offset by significant weather and voyage costs, Higman transaction costs, severance charges, and expenses related tonavigational challenges in the amendment of the employee stock award plan.2019 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 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 ended March 31, 20182019 compared with the three months ended March 31, 20172018 (dollars in thousands):
| | | Three months ended March 31, | | | | | | Three months ended March 31, | | | | |
| | | 2018 | | | 2017 | | | % Change | | | 2019 | | | 2018 | | | % Change | |
| Distribution and services | | $ | 401,285 | | | $ | 148,053 | | | | 171 | % | | $ | 376,500 | | | $ | 401,285 | | | | (6 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs of sales and operating expenses | | | 314,532 | | | | 115,179 | | | | 173 | | | | 290,465 | | | | 314,532 | | | | (8 | ) |
| Selling, general and administrative | | | 37,754 | | | | 15,706 | | | | 140 | | | | 37,391 | | | | 37,754 | | | | (1 | ) |
| Taxes, other than on income | | | 2,002 | | | | 541 | | | | 270 | | | | 2,017 | | | | 2,002 | | | | 1 | |
| Depreciation and amortization | | | 10,032 | | | | 2,922 | | | | 243 | | | | 9,018 | | | | 10,032 | | | | (10 | ) |
| | | | 364,320 | | | | 134,348 | | | | 171 | | | | 338,891 | | | | 364,320 | | | | (7 | ) |
| Operating income | | $ | 36,965 | | | $ | 13,705 | | | | 170 | % | | $ | 37,609 | | | $ | 36,965 | | | | 2 | % |
| Operating margins | | | 9.2 | % | | | 9.3 | % | | | | | | | 10.0 | % | | | 9.2 | % | | | | |
Distribution and Services Revenues
The following table shows the markets serviced by the Company’s distribution and services segment, the revenue distribution for the first quarter of 2018,2019, and the customers for each market:
| Markets Serviced | | 20182019 First Qtr.
Quarter Revenue Distribution | | Customers |
| Oil and Gas | | 68% | 59% |
| Oilfield Services, Oil and Gas Operators and Producers |
| | | | |
|
| Commercial and Industrial | | 32% | 41% |
| 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 20182019 first quarter increased 171% and operating income increased 170%decreased 6% when compared with the 2017 first quarter.quarter of 2018. The higherdecreased revenues and operating income were primarily attributable to reduced activity in the acquisition of S&S, completed on September 13, 2017, as well as acceleratedoilfield which resulted in lower customer demand for new and overhauled transmissions and related parts and service and reduced demand for new pressure pumping equipment, partially offset by increased service for pressure pumping unit remanufacturing and improved demand in the commercial and industrial market for the marine diesel engine repair business and power generation sector. For the 2019 first quarter, the oil and gas market forcontributed 59% of the remanufacture of pressure pumping units and transmission overhauls, the manufacturing of oilfield service equipment, including pressure pumping units, and for the sale and distribution of engines, transmissions and related parts. However, the strong demand challenged the Company’s vendor supply chain, 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. The oil and gas market contributed 68% of distribution and services revenues for the 2018 first quarter.revenues. In the commercial and industrial market, which contributed 32%41% of the distribution and services revenues for the 20182019 first quarter, the marine sector experienced highercontinued improved demand for diesel engines, parts and service levels for medium-speed diesel engine overhaulsin the Gulf Coast, Midwest and related parts that had previously been deferred throughout 2017.Florida. The power generation sector saw higherincreased demand from nuclear and commercial customers but saw a seasonal declinefor back-up power systems in the rental of stand-by power generators following the significant hurricane related demand2019 first quarter. Demand in the 2017 fourthnuclear power generation market was stable compared to the 2018 first quarter.
Distribution and Services Costs and Expenses
Costs and expenses for the 20182019 first quarter increased 171%decreased 7% compared with the 20172018 first quarter. Costs of sales and operating expenses for the 2019 first quarter decreased 8%, compared with the 2018 first quarter, increased 173% compared with the 2017 first quarter, reflecting the acquisition of S&S on September 13, 2017, as well as increasedlower demand for the remanufacture of pressure pumping unitsnew and transmission overhauls, improvement in the manufacturing of oilfield service equipment, including pressure pumping units, and an increase in demand for the sale and distribution of engines,overhauled transmissions and related parts and service and reduced demand for new pressure pumping equipment in the oil and gas market.
Selling, general and administrative expenses for the 20182019 first quarter increased 140%decreased 1% compared with the 20172018 first quarter, primarily due to the S&S acquisition, as well as increased activity in the oil and gas market.quarter. The 2018 first quarter included a $171,000 severance charge associated with the integration of S&S into the Company and $1,168,000 of non-cash expenses related to the amendment of the employee stock award plan.Company.
Distribution and Services Operating Income and Operating Margins
Operating income for the distribution and services segment for the 20182019 first quarter increased 170%2% compared with the 20172018 first quarter. The operating margin for the 20182019 first quarter was 9.2%10.0% compared with 9.3%9.2% for the 20172018 first quarter. 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 manufacturingincreased deliveries of oilfield service equipment at favorable margins and improved demand in the marine diesel engine repair business and the sale of new transmissions and related parts.power generation sector.
General Corporate Expenses
General corporate expenses for the 2019 first quarter were $3,084,000 compared with $4,323,000 for the 2018 first quarter. The 2018 first quarter were $4,323,000 compared with $3,528,000 for the first quarter of 2017. The 22% increase was primarilyincluded $392,000 incurred due to the corporate portion of the amendment of the employee stock award plan of $392,000.plan.
Gain (Loss) on Disposition of Assets
The Company reported a net gain on disposition of assets of $1,898,000$2,157,000 for the 20182019 first quarter compared with a net gain of $99,000$1,898,000 for the 20172018 first quarter. 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 and Expenses
The following table sets forth other income (expense), noncontrolling interests and interest expense for the three months ended March 31, 20182019 compared with the three months ended March 31, 20172018 (dollars in thousands):
| | Three months ended March 31, | | | | | | Three months ended March 31, | | | | |
| | 2018 | | 2017 | | % Change | | | 2019 | | | 2018 | | | % Change | |
| Other income (expense) | | $ | 1,591 | | | $ | (589 | ) | | | 370 | % | | $ | (568 | ) | | $ | 1,591 | | | | (136 | )% |
| Noncontrolling interests | | $ | (195 | ) | | $ | (162 | ) | | | 20 | % | | $ | (161 | ) | | $ | (195 | ) | | | (17 | )% |
| Interest expense | | $ | (9,780 | ) | | $ | (4,457 | ) | | | 119 | % | | $ | (13,201 | ) | | $ | (9,780 | ) | | | 35 | % |
Other Income (Expense)
Due to the Company’s adoption of ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” on January 1, 2018, other income for the 2019 and 2018 first quarterquarters includes income of $446,000 and $1,112,000, 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 $473,000 in the 2017 first quarter from operating expense to non-operating expense.
Interest Expense
Interest expense for the 20182019 first quarter increased 119%35% compared with the 20172018 first quarter, primarily due to borrowings to finance the cash portion of the S&S acquisition in September 2017 and Higman acquisition in February 2018.2018, the acquisition of Targa’s pressure barge fleet in May 2018, the purchase of the 155,000 barrel coastal ATB under construction in June 2018 and the acquisition of Cenac’s fleet of inland tank barges and towboats and two offshore tugboats in March 2019. During the 20182019 and 20172018 first quarters, the average debt and average interest rate (excluding capitalized interest) were $1,459,373,000 and 3.8%, and $1,266,421,000 and 3.1%, and $706,110,000 and 2.9%, respectively. Interest expense excludes capitalized interest of $198,000$643,000 and $614,000$198,000 for the three months ended March 31, 20182019 and 2017,2018, respectively.
Financial Condition, Capital Resources and Liquidity
Balance Sheet
Total assets as of March 31, 20182019 were $5,714,500,000$6,300,692,000 compared with $5,127,427,000$5,871,594,000 as of December 31, 2017.2018. The following table sets forth the significant components of the balance sheet as of March 31, 20182019 compared with December 31, 20172018 (dollars in thousands):
| | | March 31, 2018 | | | December 31, 2017 | | | % Change | | | March 31, 2019 | | | December 31, 2018 | | | % Change | |
| Assets: | | | | | | | | | | | | | | | | | | |
| Current assets | | $ | 1,056,654 | | | $ | 957,082 | | | | 10 | % | | $ | 1,118,252 | | | $ | 1,096,489 | | | | 2 | % |
| Property and equipment, net | | | 3,443,868 | | | | 2,959,265 | | | | 16 | | | | 3,792,440 | | | | 3,539,802 | | | | 7 | |
| Operating lease right-of-use assets | | | | 159,704 | | | | — | | | | 100 | |
| Goodwill | | | 935,755 | | | | 935,135 | | | | — | | | | 953,826 | | | | 953,826 | | | | — | |
| Other intangibles, net | | | 228,015 | | | | 232,808 | | | | (2 | ) | | | 219,696 | | | | 224,197 | | | | (2 | ) |
| Other assets | | | 50,208 | | | | 43,137 | | | | 16 | | | | 56,774 | | | | 57,280 | | | | — | |
| | | $ | 5,714,500 | | | $ | 5,127,427 | | | | 11 | % | | $ | 6,300,692 | | | $ | 5,871,594 | | | | 7 | % |
| Liabilities and stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | |
| Current liabilities | | $ | 531,158 | | | $ | 480,306 | | | | 11 | % | | $ | 582,724 | | | $ | 607,782 | | | | (4 | )% |
| Long-term debt – less current portion | | | 1,423,267 | | | | 992,403 | | | | 43 | | | | 1,667,457 | | | | 1,410,169 | | | | 18 | |
| Deferred income taxes | | | 517,421 | | | | 468,451 | | | | 10 | | | | 555,414 | | | | 542,785 | | | | 2 | |
| Operating lease liabilities | | | | 139,192 | | | | — | | | | 100 | |
| Other long-term liabilities | | | 100,786 | | | | 72,044 | | | | 40 | | | | 90,497 | | | | 94,557 | | | | (4 | ) |
| Total equity | | | 3,141,868 | | | | 3,114,223 | | | | 1 | | | | 3,265,408 | | | | 3,216,301 | | | | 2 | |
| | | $ | 5,714,500 | | | $ | 5,127,427 | | | | 11 | % | | $ | 6,300,692 | | | $ | 5,871,594 | | | | 7 | % |
Current assets as of March 31, 20182019 increased 11%2% compared with December 31, 2017.2018. Trade accounts receivable increased 7%5% mainly due to increased activities in the inland marine transportation market and in the distribution and services commercial and industrial market. Inventories, net, decreased 3%, primarily reflecting the increase in business activity levelsdeliveries of new pressure pumping units and international oilfield equipment in the distribution and services oil and gas market partially offset by decreasedas well as lower inventory levels to support lower business activity levels in the coastal marine transportation market. Inventories, net increased 18%, primarily reflecting higher inventories in the distribution and services oil and gas market due to the adoption of ASU 2014-09 and increased inventories to meet current business activity levels. Prepaid expenses and other current assets increased 29% primarily due to a building acquired with the Higman acquisition valued at $18,995,000 being reclassified to assets held for sale, partially offset by the sale of marine vessels in the 2018 first quarter that were classified as assets held for sale in the 2017 fourth quarter.
Property and equipment, net of accumulated depreciation, at March 31, 20182019 increased 16%7% compared with December 31, 2017.2018. The increase reflected $46,409,000$65,954,000 of capital expenditures for the first quarter of 2018,2019, more fully described under Capital Expenditures Reflected on the Balance Sheet below, the fair value of the property and equipment acquired in the HigmanCenac acquisition of $477,119,000$246,802,000 and the twothree inland pressure tank barges purchased in March 2018 of $10,400,000,2019 for $2,970,000, less $49,675,000$51,115,000 of depreciation expense and $7,307,000$11,971,000 of property disposals during the 20182019 first quarter.
Operating lease right-of-use assets increased due to the adoption of ASU 2016-02 on January 1, 2019.
Other intangibles, net, as of March 31, 20182019 decreased 2% compared with December 31, 20172018, primarily due to amortization of $4,794,000.intangibles other than goodwill.
Other assets at March 31, 2018 increased 16% compared with December 31, 2017 primarily due to the addition of deferred major maintenance dry-dock expenditures on ocean-going vessels, net of amortization.
Current liabilities as of March 31, 2018 increased 11%2019 decreased 4% compared with December 31, 2017.2018. Accounts payable increased 13%decreased 1%, primarily due to increased business activity levels in the distribution and services segment, the acquisition of Higman and higher accrued capital expenditures.decreased shipyard maintenance accruals on coastal equipment. Accrued liabilities decreased 7%,17% primarily from payment during the 20182019 first quarter of employee incentive compensation bonuses accrued during 2017, insurance claim payments during2018. Current portion of operating lease liabilities increased due to the 2018 first quarter, partially offset by a $5,036,000 increase in taxes other thanadoption of ASU 2016-02 on income, primarily waterway use taxes and property taxes associated with the Higman acquisition.January 1, 2019. Deferred revenues increased 67%decreased 10%, primarily reflecting reduced business activity levels in the distribution and services segment, reflecting changes in revenue recognition with the adoption of ASU 2014-09.oil and gas market.
Long-term debt, less current portion, as of March 31, 20182019 increased 43%18% compared with December 31, 2017,2018, primarily reflecting the issuance on February 12, 2018addition of a five-year Term Loan in an amount of $500,000,000 of 4.2% senior unsecured notes dueon March 1, 2028 to fund the acquisition of Higman, partially27, 2019, offset by net payments of $64,414,000$240,799,000 on the revolving credit facilities during the 2018 first quarter.amended and restated Revolving Credit Facility. Net debt discount and deferred issuance costs were $8,139,000$9,117,000 and $3,442,000$7,204,000 at March 31, 20182019 and December 31, 2017,2018, respectively.
Deferred income taxes as of March 31, 20182019 increased 10%2% compared with December 31, 2017,2018, primarily reflecting $43,059,000 of deferred income taxes recorded with the Higman acquisition and the 20182019 first quarter deferred tax provision of $8,846,000.$12,490,000.
Operating lease liabilities increased due to the adoption of ASU 2016-02 on January 1, 2019.
Other long-term liabilities as of March 31, 2018 increased 40%2019 decreased 4% compared with December 31, 2017.2018. The increasedecrease was primarily due to pension plan liability assumed with the Higman acquisitionadoption of $36,016,000, partially offset by a $6,717,000 contributionASU 2016-02 on January 1, 2019 and the resulting reclass of unfavorable leases to operating lease right-of-use assets and the reclass of deferred rent liabilities to long-term operating lease liabilities and contributions of $1,615,000 to the Higman pension plan during the 20182019 first quarter.
Total equity as of March 31, 20182019 increased 1%2% compared with December 31, 2017.2018. The increase was primarily the result of $32,471,000$44,296,000 of net earnings attributable to Kirby for the first quarter of 2018,2019, an increase in additional paid-in capital of $7,240,000,$4,150,000, primarily due to the employee stock award 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 $3,344,000 increase in treasury stock and a $9,722,000 decrease in the opening balance of retained earnings with the adoption of ASU 2014-09.requirements.
Long-Term Financing
On March 27, 2019, the Company entered into an amended and restated Credit Agreement with a group of commercial banks, with JPMorgan Chase Bank, N.A. as the administrative agent bank, that extends the term of the Company’s existing $850,000,000 Revolving Credit Facility to March 27, 2024 and adds a five-year Term Loan facility in an amount of $500,000,000. The Credit Agreement provides for a variable interest rate based on LIBOR or an Alternate Base Rate calculated with reference to the agent bank’s prime rate, among other factors. The interest rate varies with the Company’s credit rating and is currently 112.5 basis points over LIBOR or 12.5 basis points over the Alternate Base Rate. The Term Loan is repayable in quarterly installments commencing June 30, 2020, in increasing percentages of the original principal amount of the loan, with the remaining unpaid balance payable of 65% of the initial amount due on March 27, 2024. The Credit Agreement contains certain restricted financial covenants including an interest coverage ratio and a debt-to-capitalization ratio. In addition to financial covenants, the Credit Agreement 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. The Credit Agreement specifies certain events of default, upon the occurrence of which the maturity of the outstanding loans may be accelerated, including the failure to pay principal or interest, violation of covenants and default on other indebtedness, among other events. Borrowings under the Credit Agreement may be used for general corporate purposes including acquisitions. As of March 31, 2019, the Company was in compliance with all Credit Agreement covenants and had outstanding borrowings under the Revolving Credit Facility of $176,574,000 and $500,000,000 outstanding under the Term Loan. 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 $6,400,000 as of March 31, 2019.
On February 12, 2018, the Company issued $500,000,000 of the 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 will be $11,550,000. The Company received cash proceeds of $495,044,000, net of the original issue discount of $705,000 and debt issuance costs of $4,251,000.year. 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 on the Company’s bank credit facilities. As of March 31, 2018,2019, 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 $850,000,000 unsecured revolving credit facility (“Revolving Credit Facility”) with a syndicate of banks, with JPMorgan Chase Bank, N.A. as the administrative agent bank, with a maturity date of 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, effective February 20, 2018, due to a change in one of the Company’s credit ratings, the spread over LIBOR increased from 1.00% to 1.125% and the Alternate Base Rate spread is currently.125% over the agent bank’s prime rate. The commitment fee increased 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. As of March 31, 2018, the Company was in compliance with all Revolving Credit Facility covenants and had $423,085,000 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 $8,068,000 as of March 31, 2018.
The Company has $500,000,000 of unsecured senior notes (“Senior Notes Series A”A and “SeniorSenior Notes Series B”)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 March 31, 2018,2019, 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 $8,321,000 of debtno borrowings outstanding under the Credit Line as of March 31, 2018.2019. Outstanding letters of credit under the Credit Line were $1,146,000$1,171,000 as of March 31, 2018.2019.
Capital Expenditures Reflected on the Balance Sheet
Capital expenditures for the 20182019 first quarter were $46,409,000,$65,954,000, including $4,728,000$7,937,000 for inland tank barge and towboat construction, $6,710,000$6,904,000 for progress payments on sixthree 5000 horsepower coastal ATB tugboats, $1,838,000 for final costs on a 155,000 barrel coastal ATB under construction purchased from another operator that was delivered to the Company in the 2018 fourth quarter, and $34,971,000$49,275,000 primarily for upgrading existing marine equipment and marine transportation and distribution and services facilities.
Financing of the construction of the inland tank barge and towboats, coastal tugboats and the 155,000 barrel coastal ATB, 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 20182019 first quarter, the Company took delivery of one new inland tank barge with a capacity of approximately 29,000 barrels, acquired 16163 inland tank barges with the Higman acquisitionfrom Cenac with a total capacity of approximately 4,750,000 barrels, acquired two inland tank barges with a total capacity of approximately 35,0001,833,000 barrels and retired 12five inland tank barges, reducing its capacity by approximately 179,00091,000 barrels. The net result was an increase of 15258 inland tank barges and approximately 4,635,0001,742,000 barrels of capacity during the first quarter of 2018.2019.
The Company projects that capital expenditures for 20182019 will be in the $200,000,000$225,000,000 to $225,000,000$245,000,000 range. The 20182019 construction program will consist of one 30,000 barrel inland tank barge, progress payments on the construction of 1513 inland towboats, fiveeight of which will be placed in service in 20182019 and the remaining tenfive in 20192020 and 2020,2021, and progress payments on the construction of sixthree 5000 horsepower coastal ATB tugboats three of which willto be placed in service in 2018 and three in 2019. Based on current commitments, steel prices and projected delivery schedules, the Company’s 20182019 progress payments on the new inland tank barge and towboats will be approximately $35,000,000$25,000,000 and 20182019 progress payments on the construction of the sixthree 5000 horsepower coastal ATB tugboats will be approximately $40,000,000.$20,000,000. Approximately $100,000,000$155,000,000 to $120,000,000$165,000,000 is primarily capital upgrades and improvements to existing marine equipment and facilities. The balance of $25,000,000 to $30,000,000$35,000,000 will be for rental fleet growth, new machinery and equipment, and facilities improvements in the distribution and services 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
The Company did not purchase any treasury stock during the 20182019 first three months. As of May 3, 2018,8, 2019, 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 $38,529,000 compared with $18,734,000 for the 2018 first quarter compared with $85,202,000 for the 2017 first quarter. The increase was driven by increased revenues and operating income in the marine transportation segment driven by the acquisitions of the Higman fleet in February 2018, the Targa fleet in May 2018 and 2017 first quarters experiencedthe CGBM barges in December 2018, as well as improved inland barge pricing. The increase was also due to a net decreaseincrease in cash flows from changesthe change in operating assets and liabilities of $87,926,000 and $8,140,000, respectively. The net decrease for the 2018 first quarter in operating assets and liabilities was primarily$6,189,000 due to an increasedecrease in trade receivables from strong 2018 first quarter revenues and increased billingsinventories in the distribution and services segment and higher inventories in the distribution and services oil and gas market, primarily2019 first quarter compared to support increased business activity levels.an increase in the 2018 first 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 May 3, 2018, $444,358,0008, 2019, $685,023,000 under its Revolving Credit Facility and $8,854,000$8,829,000 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.March 27, 2024. As of March 31, 2018,2019, the Company had $418,847,000$667,026,000 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.The outstanding balance of the Term Loan is subject to quarterly amortization, beginning June 30, 2020, in increasing percentages of the original principal amount of the loan, with the remaining unpaid balance payable of 65% of the initial amount due on March 27, 2024. The Term Loan is prepayable, in whole or in part, without penalty.
There are numerous factors that may negatively impact the Company’s cash flow in 2018.2019. For a list of significant risks and uncertainties that could impact cash flows, see Note 14,15, Contingencies, in the financial statements, and Item 1A — Risk Factors and Note 14,15, Contingencies and Commitments, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. 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 $20,348,000$19,525,000 at March 31, 2018,2019, including $9,442,000$7,791,000 in letters of credit and $10,906,000$11,734,000 in performance bonds. All of these instruments have an expiration date within threetwo 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 20182019 interest expense by $715,000$507,000 based on balances outstanding at December 31, 2017,2018, 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 OfficerDisclosure Controls and the Chief Financial Officer, has evaluated theProcedures. The Company’s disclosure controls and procedures (as defined in RuleRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)), as of March 31, 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 March 31, 2018, the disclosure controls and procedures were effective are designed to ensure that information required to be disclosed by the Company in the reports that it filesare filed or submitssubmitted under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission’s rulesCommission and forms and (ii)to ensure that such information required to be disclosed is accumulated and communicated to the Company’s management, including the Chief Executive Officerprincipal executive and the Chief Financial Officer,financial officers, as appropriate to allow timely decisions regarding required disclosure. ThereThe Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), with assistance from other members of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2019 and, based on their evaluation, the CEO and CFO have concluded that the disclosure controls and procedures were not effective as of such date due to the material weakness in internal control over financial reporting as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Changes in Internal Control Over Financial Reporting. During the quarter ended March 31, 2019, the Company implemented a new lease administration and accounting system to support its adoption of ASU 2016-02, Leases. Except for the implementation of the new lease system and the remediation plan described below, there were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 20182019 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
33
Remediation Plan. As previously described in Part II, Item 9A, Controls and Procedures, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, the Company began implementing a remediation plan and has removed all inappropriate privileged access rights as of March 31, 2019. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing of the affected Information Technology operating systems, databases and applications, that these controls are operating effectively. The Company expects that the remediation of this material weakness will be completed during 2019.
PART II – OTHER INFORMATION
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, 2018.
| – | 2005 Stock and Incentive Plan |
| – | Nonemployee Director Compensation Program |
| – | Certification of Chief Executive 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 |
| 101.INS* | – | XBRL Instance Document |
| 101.SCH* | – | XBRL Taxonomy Extension Schema Document |
| 101.CAL* | – | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | – | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB* | – | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | – | XBRL Taxonomy Extension Presentation Linkbase Document |
| – | Certification of Chief Executive 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 |
| 101.INS | – | XBRL Instance Document |
| 101.SCH | – | XBRL Taxonomy Extension Schema Document |
| 101.CAL | – | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | – | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | – | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | – | 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/ WILLIAM G. HARVEY |
| | | William G. Harvey |
| | | Executive Vice President and |
| | | Chief Financial Officer |
| | |
| Dated: May 9, 2019 | | |
Dated: May 4, 2018