The Company applies the practical expedient that allows non-disclosure of information about remaining performance obligations that have original expected durations of one year or less.
On March 14, 2019, the Company completed the acquisition of the marine transportation fleet of Cenac Marine Services, LLC (“Cenac”) for $244,500,000 in cash. Cenac’s fleet consisted of 63 inland 30,000 barrel tank barges with approximately 1,833,000 barrels of capacity, 34 inland towboats and two2 offshore tugboats. Cenac transported petrochemicals, refined products and black oil, including crude oil, residual fuels, feedstocks and lubricants on the lower Mississippi River, its tributaries, and the Gulf Intracoastal 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.
The Company considers Cenac to be a natural extension of the current marine transportation segment, expanding the capabilities of the Company’s inland based marine transportation business and lowering the average age of its inland tank barge and towboat fleet.
The fair values of the assets acquired and liabilities assumed recorded at the acquisition date were as follows (in thousands):
The following tables set forth the Company’s revenues and profit or loss by reportable segment for the three months and nine months ended March 31,September 30, 2019 and 2018 and total assets as of March 31,September 30, 2019 and December 31, 2018 (in thousands):
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,” 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, 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-Risk1A — Risk Factors found in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 quarters ofthree months and nine months ended September 30, 2019 and 2018 were 59,893,000 and 59,493,000, respectively. as follows (in thousands):
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,September 30, 2019, the Company operated a fleet of 1,0611,065 inland tank barges with 23.623.7 million barrels of capacity, and operated an average of 286304 inland towboats. The Company’s coastal fleet consisted of 5149 tank barges with 4.94.7 million barrels of capacity and 4748 coastal tugboats. The Company also owns and operates four offshore dry-bulk cargo barges, four 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 in the Company’s inland marine transportation markets averaged in the low 90% range during the 2019 third quarter compared with the mid-90% range during the 2019 firstsecond quarter compared withand the low to mid-90% range during the 2018 fourththird quarter. Better weather during the 2019 third quarter and mid-90% range duringreceding flood waters on the 2018 first quarter. Strong demand from petrochemicals, black oil, refined petroleum products and agricultural chemicals customers, along with extensiveMississippi River System resulted in fewer delay days due to poor operating conditions which slowed the transport of customer cargoes, and contributed to increasedmodestly lower utilization during the 2019 firstthird quarter compared to the 2018 fourththird quarter.
Coastal tank barge utilization levels wereaveraged in the low 80%mid-80% range during the 2019 first quartersecond and third quarters compared with the high 70% range during the 2018 first quarter and 80% range in the 2018 fourththird quarter. The improvement in utilization in 2018 and 2019 primarily reflected improved customer demand and the impairment and retirementresulting in higher utilization of 12 out-of-service coastal barges during the 2017 fourth quarter.spot market capacity. Utilization in the coastal marine fleet continued to be impacted by the oversupply of smaller tank barges in the coastal industry.
During both the 2019 third quarter and first nine months and the 2018 third quarter and first quarters,nine months, approximately 65% and 70%, respectively, of marine transportation’s inland revenues were under term contracts and 35% and 30%, respectively, were spot contract revenues. Inland time charters during the 2019 third quarter and first quarternine months represented 61% and 62%, respectively, of the inland revenues under term contracts compared with 58% and 59%, respectively, in the 2018 third quarter and first quarter.nine months. Rates on inland term contracts renewed in the 2019 first quarter increased in the 4% to 6% average range compared with term contracts renewed in the first quarter of 2018. Spot contract ratesRates on inland term contracts renewed in the 2019 firstsecond quarter increased in the 5% to 8% average range compared towith term contracts renewed in the 2018 fourthsecond quarter. Rates on inland term contracts renewed in the 2019 third quarter andincreased in the 3% to 4% average range compared with term contracts renewed in the 2018 third quarter. Spot contract rates in the 2019 third quarter increased approximately 20%15% compared to the 2018 firstthird quarter and were generally unchanged from the 2019 second quarter. Effective January 1, 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 1.7%, excluding fuel.
During the 2019 and 2018 third quarters and first quarters,nine months, approximately 80% of the coastal revenues were under term contracts and 20% were spot contract revenues. Coastal time charters represented approximately 85% of coastal revenues under term contracts during the 2019 and 2018 third quarters and first quarters.nine months. Spot and term contract pricing in the 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, quartersecond and third quarters was higher in the 4% to 6% average range compared to the 2018 first, second and third quarters. Spot market rates in the 2019 third quarter improved in the 20% average range compared to the 2018 third quarter.
The marine transportation segment operating margin was 9.6%17.6% for the 2019 third quarter compared with 12.7% for the 2018 third quarter and 13.6% for the 2019 first quarternine months compared with 4.8%to 9.4% for the 2018 first quarter.nine months.
Distribution and Services
For the 2019 third quarter and first quarter,nine months, the distribution and services segment generated 51%38% and 46%, respectively, of the Company’s revenue, of which 67%85% and 73%, respectively, was generated from service and parts and 33%15% and 27%, respectively, 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 2019 third quarter and first quarternine months decreased 6% when21% and 13%, respectively, compared with the 2018 third quarter and first quarter.nine months. Operating income for the distribution and services segment for the 2019 third quarter and first nine months decreased 62% and 31%, respectively, compared with the 2018 third quarter and first nine months. The decreased revenuesdecreases were primarily attributable to reduced activity in the oilfield which resulted in lowerfurther declines in customer demand for new and remanufactured pressure pumping equipment and limited sales of 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.market. For the 2019 third quarter and first quarter,nine months, the oil and gas market contributed 59%46% and 54%, respectively, of the distribution and services revenues. In theThe commercial and industrial market, which contributed 41%54% and 46% of the distribution and services revenues for the 2019 third quarter and first quarter,nine months, respectively, saw increased service levels in the marine market experienced continued improved demand for diesel engines, parts and service in the Gulf Coast, Midwest and Florida. The power generation market sawrepair business as well as increased demand from commercial customers for back-up power systems in the 2019 first quarter. Demand in the nuclear power generation market was stableequipment compared to the 2018 third quarter and first quarter.nine months.
The distribution and services segment operating margin was 3.6% for the 2019 third quarter compared with 7.4% for the 2018 third quarter and 7.0% for the 2019 first quarter was 10.0%nine months compared with 9.2%to 8.8% for the 2018 first quarter.nine months.
Cash Flow and Capital Expenditures
The Company continued to generate favorable operating cash flow during the 2019 first quarternine months with net cash provided by operating activities of $38,529,000$387,599,000 compared with $18,734,000$272,304,000 for the 2018 first quarter,nine months, a 106%42% increase. The improvement was driven by increased revenues and operating income in the marine transportation segment driven by the Higman acquisition in February 2018, the Targa acquisition in May 2018, and the CGBM acquisition in December 2018, and the Cenac acquisition in March 2019, as well as improved coastal barge utilization and improved inland bargeand coastal pricing. The improvement was also due to a net increase in cash flows from the change in operating assets and liabilities of $6,189,000$85,685,000 due to a decrease in inventories in the distribution and services segment in the 2019 first quarternine months compared to an increase in the 2018 first quarter.nine months. The inventory decrease in the 2019 first quarternine months was primarily due to reduced inventory levels to support reducedbusiness activity levels in the oil and gas market as compared to higher inventory levels in the 2018 first quarternine months required to support increasedhigher business activity levels. In addition, during the 2019 and 2018 first quarters,nine months, the Company generated cash of $13,187,000$34,490,000 and $12,181,000,$27,806,000, respectively, from proceeds from the disposition of assets, and $1,415,000$3,563,000 and $292,000,$13,264,000, respectively, from proceeds from the exercise of stock options.
For the 2019 first quarter,nine months, cash generated and borrowings under the Company’s revolving credit facilityRevolving Credit Facility were used for capital expenditures of $60,932,000,$184,068,000, including $7,937,000$19,746,000 for inland towboat construction, $6,904,000$16,240,000 for progress payments on three 5000 horsepower coastal ATB tugboats, $1,838,000$2,178,000 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, $44,253,000and $145,904,000 primarily for upgrading existing marine equipment and marine transportation and distribution and services facilities. The Company also used $247,470,000$257,540,000 for acquisitions of businesses and marine equipment.
The Company’s debt-to-capitalization ratio increaseddecreased to 33.8%29.8% at March 31,September 30, 2019 from 30.5% at December 31, 2018, primarily due to the increase in total equity from net earnings attributable to Kirby for the 2019 first nine months of $139,570,000 and the exercise of stock options and the amortization of unearned equity compensation partially offset by borrowings under the Revolving Credit Facility and the Term Loan to purchase the Cenac fleet in the 2019 first quarter, offset by the increase in total equity from net earnings attributable to Kirby for the 2019 first quarter of $44,296,000 and the exercise of stock options, the issuance of stock for RSU vestings and the amortization of unearned equity compensation.quarter. As of March 31,September 30, 2019, the Company had $176,574,000no borrowings outstanding under its Revolving Credit Facility, $500,000,000$440,000,000 outstanding under 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 4.2% senior unsecured notes due March 1, 2028 (the “2028 Notes”) outstanding, offset by $9,117,000$8,389,000 in unamortized debt discount and issuance costs.costs (of which $2,806,000 attributable to the Revolving Credit Facility is currently included in other assets on the balance sheet).
During the 2019 first quarter,nine months, the Company acquired 63 inland tank barges from Cenac with a total capacity of approximately 1,833,000 barrels, and retired fivenine inland tank barges, reducingbrought back into service six inland tank barges, and chartered two inland tank barges, increasing its capacity by approximately 91,00054,000 barrels. The net result was an increase of 5862 inland tank barges and approximately 1,742,0001,887,000 barrels of capacity during the 2019 first quarter of 2019.nine months.
The Company projects that capital expenditures for 2019 will be in the $225,000,000 to $245,000,000 range. The 2019 construction program will consist of progress payments on the construction of 13 inland towboats, eightseven of which will behave been placed in service in 2019 and the remaining fivesix are scheduled to be placed in service in 2020 and 2021, and progress payments on the construction of three 5000 horsepower coastal ATB tugboats to be placed in service in 2019.2019, two of which were placed in service during the 2019 first nine months. Based on current commitments, steel prices and projected delivery schedules, the Company’s 2019 progress payments on the new inland towboats will be approximately $20,000,000 to $25,000,000 and 2019 progress payments on the construction of the three 5000 horsepower coastal ATB tugboats will be approximately $20,000,000. Approximately $155,000,000 to $165,000,000 is primarily capital upgrades and improvements to existing marine equipment and facilities. The balance of $25,000,000$30,000,000 to $35,000,000 will be for rental fleet growth, new machinery and equipment, and facilities improvements in the distribution and services segment.
information technology projects.
Outlook
In 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 and growth in petrochemicals as 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 the Gulf Coast.on-line. These factors, combined with only modest inland barge additions, are expected to result in inland barge utilization rates in the mid-90%low-90% range during the year.fourth quarter. Together with a full year of contribution from 2018 acquisitions, 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 increase during 2019. In the 2019 fourth quarter, the onset of winter weather and lock closures on the Gulf Intracoastal Waterway and the Illinois River will have an adverse impact on operating efficiencies. Additionally, operating expenses are expected to increase as a significant number of barges, which were acquired in recent acquisitions, are scheduled for regulatory maintenance. Overall, inland revenue in the 2019 fourth quarter is expected to be stable compared to the 2019 third quarter. Operating income is expected to decrease compared to the 2019 third quarter as a result of reduced operating efficiencies and higher operating expenses.
As of March 31,September 30, 2019, the Company estimated there were approximately 3,8003,850 inland tank barges in the industry fleet, of which approximately 400350 were over 30 years old and approximately 240 of those over 40 years old. The Company estimates that approximately 190150 tank barges have been ordered for deliverywill be delivered throughout 2019 and many older tank barges, including an expected nine14 by the Company, will be retired, dependent on 2019 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, the Company expects revenues and operating income to improve as compared to 2018, with coastal tank barge utilization increasing modestly intoin the low to mid-80% range for 2019.the fourth quarter. Improving market conditions are expected to be driven by stable to slightly improving customer demand and expected additional industry retirements of aging barges due to BWMSballast water management treatment systems regulations. The Company expects pricing to increase modestly with low to mid-single digit improvementIn the 2019 fourth quarter, seasonal activity declines in Alaska and scheduled shipyard maintenance on most renewing term contractsseven coastal tank barges, of which six are large capacity vessels, will have an adverse impact on revenue and spot market rates as industry utilization improves.operating income.
As of March 31,September 30, 2019, the Company estimated there were approximately 290280 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 1510 of those were over 30 years old. The Company is aware of threefour announced coastal tank barge and tugboat units in the 195,000 barrel or less category under construction by competitorscompetitors. Three units are for delivery in 2019, two of which were delivered in the first nine months of the year, and two coastal tank barge and tugboat units greater than 195,000 barrels under constructionone is scheduled for delivery in 2020.2021.
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.
Recent oilfield activity declines and crude oil price volatility in the 2018 fourth quarter have created some uncertainty for the Company’s oil and gas businessesmarket which couldwill extend for the duration of 2019. These market dynamicsFirm commitments and the pace of orders for new pressure pumping equipment have resulted in lower sales of new engines, transmissions and associated partsslowed considerably thus far in 2019 and will likely continue until oilfield activity improves. In manufacturing, the orders for new and remanufactured2019. Additionally, maintenance on existing pressure pumping units, transmission overhauls, and equipmentparts sales have also slowed during the 2019 first quarter. Additionally, a numberdeclined to minimal levels. Based on current activity levels, orders and deliveries of new pressure pumping units which wereequipment are expected to remain low through the 2019 fourth quarter, and maintenance activities are expected to be delivered inminimal. Transmission overhauls and parts sales are also expected to remain at reduced levels during the 2019 second quarter are likely to be delayed into the 2019 thirdfourth quarter. As a result, revenues and operating income for the Company’s oil and gas market are expected to decline in the 2019 second quarteras compared to the 2019 first quarter. The manufacturing outlook for the second half of 2019 will be dependent on additional orders for new and remanufactured pressure pumping equipment and oilfield equipment for international markets.
2018.
For the distribution and services commercial and industrial market, the Company anticipates revenues and operating income to increasebe higher in 2019 than 2018 with higher anticipatedimproved demand for standby power generation and specialty equipment rentals. Activity in the nuclear standby power generation market and the commercial marine markets is expected to be stable in 2019. In the 2019 fourth quarter, revenues and operating income are expected to decline compared to the 2019 third quarter as a result of seasonal utilization reductions in the power generation rental fleet as the summer storm season along the Gulf Coast ends.
Acquisitions
On March 29,During the nine months ended September 30, 2019, the Company purchased threenine inland tank barges from a leasing companycompanies for $2,970,000$13,040,000 in cash. The Company had been leasing the barges prior to the purchase.purchases. Financing of the equipment acquisitionacquisitions was through operating cash flows and borrowings under the Company’s revolving credit facility.Revolving Credit Facility.
On March 14, 2019, the Company completed the acquisition of the marine transportation fleet of Cenac for $244,500,000 in cash. Cenac’s fleet consisted of 63 inland 30,000 barrel tank barges with approximately 1,833,000 barrels of capacity, 34 inland towboats and two offshore tugboats. Cenac transported petrochemicals, refined products and black oil, including crude oil, residual fuels, feedstocks and lubricants on the lower Mississippi River, its tributaries, and the Gulf Intracoastal 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 Company’s revolving credit facility.Revolving Credit Facility.
Results of Operations
The Company reported 2019 firstthird quarter net earnings attributable to Kirby of $44,296,000,$47,987,000, or $0.74$0.80 per share, on revenues of $744,621,000,$666,809,000, compared with 2018 firstthird quarter net earnings attributable to Kirby of $32,471,000,$41,816,000, or $0.54$0.70 per share, on revenues of $741,688,000.$704,845,000. Net earnings attributable to Kirby for the 2019 first nine months were $139,570,000, or $2.32 per share, on revenues of $2,182,472,000, compared with $102,889,000, or $1.72 per share, on revenues of $2,249,204,000 for the 2018 first nine months. The 2018 first quarternine months results included a one-time non-deductible expense of $18,057,000, or $0.30 per share, related to the retirement of Joseph H. Pyne as executive Chairman of the Board of Directors, effective April 30, 2018, and reflected the acquisition of Higman on February 14, 2018, and includedincluding $3,261,000 before taxes, or $0.04 per share, of one-time transaction costs associated with the acquisition, as well as $2,912,000 before taxes, or $0.04 per share, of severance and retirement expenses, primarily related to cost reduction initiatives in the coastal marine transportation market and the integration of Higman. In addition,
The following table sets forth the 2018 first quarter included $3,938,000 before taxes, or $0.05 per share, of non-cash expenses related to an amendment to the employee stock award plan. The result of the amendment is shorter expense accrual periods on stock optionsCompany’s marine transportation 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 2019 first quarter were $368,121,000, or 49% of total revenues, compared with $340,403,000, or 46% of total revenues, for the 2018 first quarter. Distributiondistribution and services revenues for the three months and nine months ended September 30, 2019 first quarter were $376,500,000, or 51% of total revenues, compared with $401,285,000, or 54%the three months and nine months ended September 30, 2018 and the percentage of each to total revenues for the 2018 first quarter.comparable periods (dollars in thousands):
| | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2019 | | | % | | | 2018 | | | % | | | 2019 | | | % | | | 2018 | | | % | |
Marine transportation | | $ | 412,665 | | | | 62 | % | | $ | 382,040 | | | | 54 | % | | $ | 1,185,072 | | | | 54 | % | | $ | 1,100,606 | | | | 49 | % |
Distribution and services | | | 254,144 | | | | 38 | | | | 322,805 | | | | 46 | | | | 997,400 | | | | 46 | | | | 1,148,598 | | | | 51 | |
| | $ | 666,809 | | | | 100 | % | | $ | 704,845 | | | | 100 | % | | $ | 2,182,472 | | | | 100 | % | | $ | 2,249,204 | | | | 100 | % |
Marine Transportation
The Company, through its marine transportation segment, is a provider of marine transportation services, operating tank barges and towing vessels transporting bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, coastwise along all three United States coasts and in Alaska and Hawaii. The Company transports petrochemicals, black oil, refined petroleum products and agricultural chemicals by tank barge. As of March 31,September 30, 2019, the Company operated 1,0611,065 inland tank barges, including 2824 leased barges, with a total capacity of 23.623.7 million barrels. This compares with 993981 inland tank barges operated as of March 31,September 30, 2018, including 3132 leased barges, with a total capacity of 21.921.6 million barrels. The Company operated an average of 286304 inland towboats during the 2019 firstthird quarter, of which an average of 8173 were chartered, compared with 262282 during the 2018 firstthird quarter, of which an average of 7775 were chartered.
The Company’s coastal tank barge fleet as of March 31,September 30, 2019, consisted of 5149 tank barges, threetwo of which were leased, with 4.94.7 million barrels of capacity, and 4748 tugboats, fourfive of which were chartered. This compares with 5554 coastal tank barges operated as of March 31,September 30, 2018, sevensix of which were leased, with 5.25.1 million barrels of capacity, and 50 tugboats, four of which were chartered. The Company owns and operates four offshore dry-bulk cargo barge and tugboat 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’ssegment revenues, costs and expenses, operating income and operating margins for the three months and nine months ended March 31,September 30, 2019 compared with the three months and nine months ended March 31,September 30, 2018 (dollars in thousands):
| | Three months ended March 31, | | | | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2019 | | | 2018 | | | % Change | | | 2019 | | | 2018 | | | % Change | | | 2019 | | | 2018 | | | % Change | |
Marine transportation revenues | | $ | 368,121 | | | $ | 340,403 | | | | 8 | % | | $ | 412,665 | | | $ | 382,040 | | | | 8 | % | | $ | 1,185,072 | | | $ | 1,100,606 | | | | 8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs of sales and operating expenses | | | 246,190 | | | | 238,785 | | | | 3 | | | | 257,869 | | | | 248,347 | | | | 4 | % | | | 771,596 | | | | 744,154 | | | | 4 | % |
Selling, general and administrative | | | 33,217 | | | | 35,576 | | | | (7 | ) | | | 28,424 | | | | 29,408 | | | | (3 | )% | | | 90,896 | | | | 94,456 | | | | (4 | )% |
Taxes, other than on income | | | 7,966 | | | | 6,522 | | | | 22 | | | | 9,230 | | | | 8,624 | | | | 7 | % | | | 26,355 | | | | 23,805 | | | | 11 | % |
Depreciation and amortization | | | 45,324 | | | | 43,340 | | | | 5 | | | | 44,445 | | | | 47,144 | | | | (6 | )% | | | 134,861 | | | | 135,266 | | | | — | % |
| | | 332,697 | | | | 324,223 | | | | 3 | | | | 339,968 | | | | 333,523 | | | | 2 | % | | | 1,023,708 | | | | 997,681 | | | | 3 | % |
Operating income | | $ | 35,424 | | | $ | 16,180 | | | | 119 | % | | $ | 72,697 | | | $ | 48,517 | | | | 50 | % | | $ | 161,364 | | | $ | 102,925 | | | | 57 | % |
| | | | | | | | | | | | | |
Operating margins | | | 9.6 | % | | | 4.8 | % | | | | | | | 17.6 | % | | | 12.7 | % | | | | | | | 13.6 | % | | | 9.4 | % | | | | |
Marine Transportation Revenues
The following table shows the marine transportation markets serviced by the Company, the marine transportation revenue distribution for the 2019 third quarter and first quarter of 2019,nine months, products moved and the drivers of the demand for the products the Company transports:
Markets Serviced | | 2019 First
Quarter
Revenue
Distribution
| | Products Moved | | Drivers |
Petrochemicals | | | 56% |
| Benzene, Styrene, Methanol, Acrylonitrile, Xylene, Naphtha, Caustic Soda, Butadiene, Propylene | | Consumer non-durables — 70%, Consumer durables — 30% |
| | | | | | | |
Black Oil | | | 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 | | | 19% |
| Gasoline, No. 2 Oil, Jet Fuel, Heating Oil, Diesel Fuel, Ethanol | | Vehicle Usage, Air Travel, Weather Conditions, Refinery Utilization |
| | | | | | | |
Agricultural Chemicals | | | 3% |
| Anhydrous Ammonia, Nitrogen-Based Liquid Fertilizer, Industrial Ammonia | | Corn, Cotton and Wheat Production, Chemical Feedstock Usage |
Markets Serviced | | 2019 Third Quarter Revenue Distribution | | 2019 Nine Months Revenue Distribution | | Products Moved | | Drivers |
Petrochemicals | | 53% | | 54% | | Benzene, Styrene, Methanol, Acrylonitrile, Xylene, Naphtha, Caustic Soda, Butadiene, Propylene | | Consumer non-durables – 70%, Consumer durables – 30% |
| | | | | | | | |
Black Oil | | 24% | | 23% | | 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 | | 19% | | 19% | | Gasoline, No. 2 Oil, Jet Fuel, Heating Oil, Diesel Fuel, Ethanol | | Vehicle Usage, Air Travel, Weather Conditions, Refinery Utilization |
| | | | | | | | |
Agricultural Chemicals | | 4% | | 4% | | Anhydrous Ammonia, Nitrogen – Based Liquid Fertilizer, Industrial Ammonia | | Corn, Cotton and Wheat Production, Chemical Feedstock Usage |
Marine transportation revenues for both the 2019 third quarter and first quarternine months increased 8% when compared with the 2018 third quarter and first quarter.nine months. The increase was primarily due to the addition of the Higman fleet acquired on February 14, 2018, the Targa pressure barges acquired on May 10, 2018, and the CGBM inland tank barges acquired on December 14, 2018, and the Cenac fleet acquired on March 14, 2019, as well as improved barge utilization in the coastal market 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 System, closures of key waterways as a result of lock maintenance projects, and a fire at a chemical storage facility onextended delays in the Houston Ship Channel, and increased shipyard days on several large capacity coastal vessels.vessels during the 2019 first quarter. For the 2019 and 2018 firstthird quarters, the inland tank barge fleet contributed 77% and 74%76%, respectively, and the coastal fleet contributed 23% and 26%24%, respectively, of marine transportation revenues. For the 2019 and 2018 first nine months, the inland tank barge fleet contributed 77% and 75%, respectively, and the coastal fleet contributed 23% and 25%, respectively, of marine transportation revenues. The Cenac fleet was quickly integrated into the Company’s own fleet. The Cenac equipment began to operate on the Company’s contracts soon after the acquisition and Cenac barges worked with the Company’s towboats and vice versa resulting in differences in vessel utilization and pricing among individual assets and the consolidated fleet. Due to this quick integration, it is not practical to provide a specific amount of revenues for Cenac but the acquisition in March 2019 was one of the factors that drove increases in marine transportation revenues in 2019 as compared to 2018.
Tank barge utilization levels in the Company’s inland marine transportation markets averaged in the low 90% range during the 2019 third quarter compared with the mid-90% range during the 2019 firstsecond quarter compared withand the low to mid-90% range during the 2018 fourththird quarter. Better weather during the 2019 third quarter and mid-90% range duringreceding flood waters on the 2018 first quarter. Strong demand from petrochemicals, black oil, refined petroleum products and agricultural chemicals customers, along with extensiveMississippi River System resulted in fewer delay days due to poor operating conditions which slowed the transport of customer cargoes, and contributed to increasedmodestly lower utilization during the 2019 firstthird quarter compared to the 2018 fourththird quarter.
Coastal tank barge utilization levels wereaveraged in the low 80%mid-80% range during the 2019 first quartersecond and third quarters compared with the high 70% range during the 2018 first quarter and the 80% range in the 2018 fourththird quarter. The improvement in utilization in 2018 and 2019 primarily reflected improved customer demand and the impairment and retirementresulting in higher utilization of 12 out-of-service coastal barges during the 2017 fourth quarter.spot market capacity. Utilization in the coastal marine fleet continued to be impacted by the oversupply of smaller tank barges in the coastal industry.
The petrochemical market, the Company’s largest market, contributed
56%53% and 54% of marine transportation revenues for the 2019
third quarter and first
quarter,nine months, respectively, reflecting continued stable volumes from Gulf Coast petrochemical plants for both domestic consumption and to terminals for export destinations plus the addition of the Targa pressure barges in 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 2018 and the 2019 first
quarternine months benefited the market.
The black oil market, which contributed 22%24% and 23% of marine transportation revenues for the 2019 third quarter and first quarter,nine months, respectively, reflected continued stablestrong demand from steady refinery production levels and the export of 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.vessels. Additionally, the Company transported increased volumes of Utica natural gas condensate downriver from the Mid-Atlantic to the Gulf Coast and Canadian and Bakken crude downriver from the Midwest to the Gulf Coast.
The refined petroleum products market, which contributed 19% of marine transportation revenues for both the 2019 third quarter and first quarternine months, reflected stable volumes in the inland market, partially offset by lower utilizationreduced volumes in the coastal market, primarilyas a result of one barge retirement and the oversupplyreturn of coastal tank barge capacity.three leased barges which transported refined products.
The agricultural chemical market, which contributed 3%4% of marine transportation revenues for both the 2019 third quarter and first quarter,nine months, saw typical seasonal demand for transportation of both domestically produced and imported products during the quarter.first nine months.
For the firstthird quarter of 2019, the inland operations incurred 4,6132,284 delay days, 82%10% fewer than the 2,534 delay days that occurred during the 2018 third quarter. For the 2019 first nine months, the inland operations incurred 10,228 delay days, 50% more than the 2,5286,797 delay days that occurred during the 2018 first quarter and 42% more than the 3,249 delay days that occurred during the 2018 fourth quarter.nine months. Delay days measure the lost time incurred by a tow (towboat and one or more tank barges) during transit when the tow is stopped due to weather, lock conditions or other navigational factors. The increase in delay days for the 2019 first quarternine months compared to the 2018 first and fourth quartersnine months reflected unusually poor operating conditions during the 2019 first quarternine months due to heavy fog along the Gulf Coast, extended periods of ice on the Illinois River, near record high water conditions on the Mississippi River andSystem, closures of key waterways as a result of lock maintenance projects and a fire at a chemical storage facility onextended delays in the Houston Ship Channel. Delay days decreased for the 2019 third quarter compared to the 2018 third quarter as flood waters on the Mississippi River System receded in the beginning of August 2019.
During both the 2019 and 2018 third quarters and first quarters,nine months, approximately 65% and 70%, respectively, of marine transportation’s inland revenues were under term contracts and 35% and 30%, respectively, were spot contract revenues. Inland time charters during the 2019 third quarter and first quarternine months represented 61% and 62%, respectively, of the inland revenues under term contracts compared with 58% and 59%, respectively, in the 2018 third quarter and first quarter.nine months. Rates on inland term contracts renewed in the 2019 first quarter increased in the 4% to 6% average range compared with term contracts renewed in the first quarter of 2018. Spot contract ratesRates on inland term contracts renewed in the 2019 firstsecond quarter increased in the 5% to 8% average range compared towith term contracts renewed in the 2018 fourthsecond quarter. Rates on inland term contracts renewed in the 2019 third quarter andincreased in the 3% to 4% average range compared with term contracts renewed in the 2018 third quarter. Spot contract rates in the 2019 third quarter increased approximately 20%15% compared to the 2018 firstthird quarter and were generally unchanged from the 2019 second quarter. Effective January 1, 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 1.7%, excluding fuel.
During both the 2019 and 2018 third quarters and first quarters,nine months, approximately 80% of the coastal revenues were under term contracts and 20% were spot contract revenues. Coastal time charters represented approximately 85% of coastal revenues under term contracts during the 2019 and 2018 third quarters and first quarters.nine months. Spot and term contract pricing in the 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, quartersecond and third quarters was higher in the 4% to 6% average range compared to the 2018 first, second and third quarters. Spot market rates in the 2019 third quarter improved in the 20% average range compared to the 2018 third quarter.
Marine Transportation Costs and Expenses
Costs and expenses for the 2019 third quarter and first quarternine months increased 2% and 3% when, respectively, compared with the 2018 third quarter and first quarter.nine months. Costs of sales and operating expenses for both the 2019 third quarter and first quarternine months increased 3%4% compared with the 2018 third quarter and first quarter,nine months, primarily due to the addition of the Higman fleet in February 2018.2018 and the Cenac fleet in March 2019, partially offset by lower fuel costs.
The inland marine transportation fleet operated an average of 286304 inland towboats during the 2019 firstthird quarter, of which an average of 8173 were chartered, compared with 262282 during the 2018 firstthird quarter, of which an average of 7775 were chartered. The increase was primarily due to the addition of inland towboats with the HigmanCenac acquisition on February 14, 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, 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-thirdone-fourth of its horsepower requirements.
During the 2019 firstthird quarter, the inland operations consumed 11.413.2 million gallons of diesel fuel compared to 11.312.9 million gallons of diesel fuel consumed during the 2018 firstthird quarter. The average price per gallon of diesel fuel consumed during the 2019 firstthird quarter was $1.93$2.00 per gallon compared with $2.04$2.23 per gallon for the 2018 third quarter. For the 2019 first quarter.nine months, the inland operations consumed 37.2 million gallons of diesel fuel compared to 36.8 million gallons consumed during the 2018 first nine months. The average price per gallon of diesel fuel consumed during the 2019 first nine months was $2.06 compared with $2.13 for the 2018 first nine months. Fuel escalation and de-escalation clauses on term contracts are designed to rebate fuel costs when prices decline and recover additional fuel costs when fuel prices rise; however, there is generally a 30 to 90 day delay before the contracts are adjusted. Spot contracts do not have escalators for fuel.
Selling, general and administrative expenses for the 2019 third quarter and first quarternine months decreased 7%3% and 4%, respectively, compared with the 2018 third quarter and first quarter.nine months. The decrease was primarily due to transactionstransaction costs of $3,261,000, 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 quarternine months due to Cenac acquisition related costs of $247,000$442,000 and salaries andas well as related costs of the acquired personnel of Higman.
Taxes, other than on income, for the 2019 third quarter and first quarternine months increased 22%7% and 11%, respectively, compared with the 2018 third quarter and first quarter,nine months, mainly due to higher property taxes on marine transportation equipment, including the Higman, Targa, CGBM, and CGBM fleets, and higher waterway use taxes due to higher business activity levels, mainly due to the Higman acquisition.Cenac fleets.
Marine Transportation Operating Income and Operating Margins
Marine transportation operating income for the 2019 third quarter and first quarternine months increased 119%50% and 57%, respectively, compared with the 2018 third quarter and first quarter.nine months. The 2019 first quarter operating margin was 9.6%17.6% for the 2019 third quarter compared with 4.8%12.7% for the 2018 third quarter and 13.6% for the 2019 first nine months compared with 9.4% for the 2018 first quarter.nine months. The operating income increase in the 2019 firstthird quarter, compared to the 2018 firstthird quarter, was primarily due to the acquisitions of Higman, Targa’s pressure barge fleet, and CGBM’s inland tank barges, and Cenac’s fleet as well as improved barge utilization in the coastal market and spot and term contract pricing in the inland and coastal markets, and cost reductions in the coastal market implemented during 2018, partially offset by significant weather and navigational challenges in the 2019 first quarter.nine months. Flood waters on the Mississippi River System receded in the beginning of August 2019.
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’ssegment revenues, costs and expenses, operating income and operating margins for the three months and nine months ended March 31,September 30, 2019 compared with the three months and nine months ended March 31,September 30, 2018 (dollars in thousands):
| | Three months ended March 31, | | | | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2019 | | | 2018 | | | % Change | | | 2019 | | | 2018 | | | % Change | | | 2019 | | | 2018 | | | % Change | |
Distribution and services | | $ | 376,500 | | | $ | 401,285 | | | | (6 | )% | |
Distribution and services revenues | | | $ | 254,144 | | | $ | 322,805 | | | | (21 | )% | | $ | 997,400 | | | $ | 1,148,598 | | | | (13 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs of sales and operating expenses | | | 290,465 | | | | 314,532 | | | | (8 | ) | | | 200,645 | | | | 250,074 | | | | (20 | )% | | | 787,068 | | | | 896,212 | | | | (12 | )% |
Selling, general and administrative | | | 37,391 | | | | 37,754 | | | | (1 | ) | | | 33,608 | | | | 36,965 | | | | (9 | )% | | | 108,194 | | | | 115,682 | | | | (6 | )% |
Taxes, other than on income | | | 2,017 | | | | 2,002 | | | | 1 | | | | 1,674 | | | | 1,888 | | | | (11 | )% | | | 5,102 | | | | 5,762 | | | | (11 | )% |
Depreciation and amortization | | | 9,018 | | | | 10,032 | | | | (10 | ) | | | 9,085 | | | | 9,964 | | | | (9 | )% | | | 27,167 | | | | 29,873 | | | | (9 | )% |
| | | 338,891 | | | | 364,320 | | | | (7 | ) | | | 245,012 | | | | 298,891 | | | | (18 | )% | | | 927,531 | | | | 1,047,529 | | | | (11 | )% |
Operating income | | $ | 37,609 | | | $ | 36,965 | | | | 2 | % | | $ | 9,132 | | | $ | 23,914 | | | | (62 | )% | | $ | 69,869 | | | $ | 101,069 | | | | (31 | )% |
Operating margins | | | 10.0 | % | | | 9.2 | % | | | | | | | 3.6 | % | | | 7.4 | % | | | | | | | 7.0 | % | | | 8.8 | % | | | | |
Distribution and Services Revenues
The following table shows the markets serviced by the Company’s distribution and services segment, the revenue distribution for the 2019 third quarter and first quarter of 2019,nine months, and the customers for each market:
Markets Serviced | | 2019 First
Quarter
Revenue
Distribution
| | Customers |
Oil and Gas | | | 59%
|
| Oilfield Services, Oil and Gas Operators and Producers |
| | | | |
|
Commercial and Industrial | | | 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 |
Markets Serviced | | 2019 Third Quarter Revenue Distribution | | 2019 Nine Months Revenue Distribution | | Customers |
Oil and Gas | | 46% | | 54% | | Oilfield Services, Oil and Gas Operators and Producers |
| | | | | | |
Commercial and Industrial | | 54% | | 46% | | 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 2019 third quarter and first quarternine months decreased 6% when21% and 13%, respectively, compared with the 2018 third quarter and first quarter of 2018.nine months. The decreased revenues weredecrease was primarily attributable to reduced activity in the oilfield which resulted in further declines in customer demand for new and remanufactured pressure pumping equipment and limited sales of new and overhauled transmissions and related parts and service, partially offset by improved demand in the commercial and industrial market. For the 2019 third quarter and first nine months, the oil and gas market contributed 46% and 54%, respectively, of distribution and services revenues. The commercial and industrial market, which contributed 54% and 46% of distribution and services revenues for the 2019 third quarter and first nine months, respectively, saw increased demand for back-up power generation equipment compared to the 2018 third quarter and first nine months.
Distribution and Services Costs and Expenses
Costs and expenses for the 2019 third quarter and first nine months decreased 18% and 11%, respectively, compared with the 2018 third quarter and first nine months. Costs of sales and operating expenses for the 2019 third quarter and first nine months decreased 20% and 12%, respectively, compared with the 2018 third quarter and first nine months, reflecting lower customerdemand for new and remanufactured pressure pumping equipment and reduced 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 contributed 59% of the distribution and services revenues. In the commercial and industrial market, which contributed 41% of the distribution and services revenues for the 2019 first quarter, the marine sector experienced continued improved demand for diesel engines, parts and service in the Gulf Coast, Midwest and Florida. The power generation sector saw increased demand from commercial customers for back-up power systems in the 2019 first quarter. Demand in the nuclear power generation market was stable compared to the 2018 first quarter.
Distribution and Services Costs and Expenses
Costs and expenses for the 2019 first quarter decreased 7% compared with the 2018 first quarter. Costs of sales and operating expenses for the 2019 first quarter decreased 8%, compared with the 2018 first quarter, reflecting lower demand for new and 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 2019 third quarter and first quarternine months decreased 1%9% and 6%, respectively, compared with the 2018 third quarter and first quarter. Thenine months primarily due to lower incentive compensation and professional fees.
Depreciation and amortization expenses for both the 2019 third quarter and first nine months decreased 9%, compared to the 2018 third quarter and first quarter included a $171,000 severance charge associated with the integrationnine months primarily due to sales of S&S into the Company.distribution and services facilities resulting in lower depreciation.
Distribution and Services Operating Income and Operating Margins
Operating income for the distribution and services segment for the 2019 third quarter and first quarter increased 2%nine months decreased 62% and 31%, respectively, compared with the 2018 third quarter and first quarter.nine months. The operating margin was 3.6% for the 2019 third quarter compared with 7.4% for the 2018 third quarter and 7.0% for the 2019 first quarter was 10.0%nine months compared with 9.2%8.8% for the 2018 first quarter.nine months. The results primarily reflected decreased sales in higher margin oil and gas related revenue and increased deliveriessales of oilfield equipment at favorable margins and improved demand in the marine diesel engine repair business and thelower margin power generation sector.equipment.
General Corporate Expenses
General corporate expenses for the 2019 firstthird quarter were $3,084,000$3,554,000 compared with $4,323,000$4,492,000 for the 2018 third quarter. For the 2019 first nine months, general corporate expenses were $10,284,000 compared with $31,822,000 for the 2018 first quarter. The 2018 first quarter included $392,000 incurrednine months primarily due to a one-time non-deductible expense of $18,057,000 in the corporate portion2018 second quarter related to the retirement of the amendment of the employee stock award plan.Company’s executive Chairman, effective April 30, 2018.
Gain (Loss) on Disposition of Assets
The Company reported a net loss on disposition of assets of $374,000 for the 2019 third quarter compared to a net gain of $18,000 for the 2018 third quarter. For the 2019 first nine months, the Company reported a net gain on disposition of assets of $2,157,000 for the 2019 first quarter$4,901,000 compared with a net gain of $1,898,000to $2,358,000 for the 2018 first quarter.nine months. The net gainsloss and lossesgains were predominantly from the salesales or retirementretirements of marine equipment and the sale of distribution and services’ properties.services facilities.
Other Income and Expenses
The following table sets forth other income, (expense), noncontrolling interests and interest expense for the three months and nine months ended March 31,September 30, 2019 compared with the three months and nine months ended March 31,September 30, 2018 (dollars in thousands):
| | Three months ended March 31, | | | | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2019 | | | 2018 | | | % Change | | | 2019 | | | 2018 | | | % Change | | | 2019 | | | 2018 | | | % Change | |
Other income (expense) | | $ | (568 | ) | | $ | 1,591 | | | | (136 | )% | |
Other income | | | $ | 864 | | | $ | 1,454 | | | | (41 | )% | | $ | 2,677 | | | $ | 4,586 | | | | (42 | )% |
Noncontrolling interests | | $ | (161 | ) | | $ | (195 | ) | | | (17 | )% | | $ | (163 | ) | | $ | (134 | ) | | | 22 | % | | $ | (477 | ) | | $ | (520 | ) | | | (8 | )% |
Interest expense | | $ | (13,201 | ) | | $ | (9,780 | ) | | | 35 | % | | $ | (14,310 | ) | | $ | (12,345 | ) | | | 16 | % | | $ | (43,026 | ) | | $ | (34,665 | ) | | | 24 | % |
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, otherOther income for the 2019 and 2018 firstthird quarters includesinclude income of $446,000$865,000 and $1,112,000,$1,159,000, respectively, and the 2019 and 2018 first nine months include income of $2,591,000 and $3,375,000, respectively, for all components of net benefit costs except the service cost component related to the Company’s defined benefit plans.
Interest Expense
Interest expense for the 2019 third quarter and first quarternine months increased 35%16% and 24%, respectively, compared with the 2018 third quarter and first quarter,nine months, primarily due to borrowings to finance the Higman acquisition in February 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, the acquisition of CGBM’s tank barges in December 2018, and the acquisition of Cenac’s fleet of inland tank barges and towboats and two offshore tugboats in March 2019. During the 2019 and 2018 firstthird quarters, the average debt and average interest rate (excluding capitalized interest) were $1,459,373,000$1,513,607,000 and 3.7%, and $1,421,613,000 and 3.6%, respectively. For the 2019 and 2018 first nine months, the average debt and average interest rate (excluding capitalized interest) were $1,538,097,000 and 3.8%, and $1,266,421,000$1,366,546,000 and 3.1%3.5%, respectively. Interest expense excludes capitalized interest of $643,000 and $198,000 for the three months ended March 31, 2019 and 2018 third quarters of $137,000 and $808,000, respectively, and for the 2019 and 2018 first nine months of $962,000 and $1,317,000, respectively.
Financial Condition, Capital Resources and Liquidity
Balance SheetSheets
Total assets as of March 31,September 30, 2019 were $6,300,692,000$6,127,885,000 compared with $5,871,594,000 as of December 31, 2018. The following table sets forth the significant components of the balance sheetsheets as of March 31,September 30, 2019 compared with December 31, 2018 (dollars in thousands):
| | March 31, 2019 | | | December 31, 2018 | | | % Change | | | September 30, 2019 | | | December 31, 2018 | | | % Change | |
Assets: | | | | | | | | | | | | | | | | | | |
Current assets | | $ | 1,118,252 | | | $ | 1,096,489 | | | | 2 | % | | $ | 958,533 | | | $ | 1,096,489 | | | | (13 | )% |
Property and equipment, net | | | 3,792,440 | | | | 3,539,802 | | | | 7 | | | | 3,793,732 | | | | 3,539,802 | | | | 7 | |
Operating lease right-of-use assets | | | 159,704 | | | | — | | | | 100 | | | | 156,798 | | | | — | | | | 100 | |
Goodwill | | | 953,826 | | | | 953,826 | | | | — | | | | 953,826 | | | | 953,826 | | | | — | |
Other intangibles, net | | | 219,696 | | | | 224,197 | | | | (2 | ) | | | 210,173 | | | | 224,197 | | | | (6 | ) |
Other assets | | | 56,774 | | | | 57,280 | | | | — | | | | 54,823 | | | | 57,280 | | | | (4 | ) |
| | $ | 6,300,692 | | | $ | 5,871,594 | | | | 7 | % | | $ | 6,127,885 | | | $ | 5,871,594 | | | | 4 | % |
Liabilities and stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities | | $ | 582,724 | | | $ | 607,782 | | | | (4 | )% | | $ | 516,991 | | | $ | 607,782 | | | | (15 | )% |
Long-term debt – less current portion | | | 1,667,457 | | | | 1,410,169 | | | | 18 | | |
Long-term debt, net – less current portion | | | | 1,434,417 | | | | 1,410,169 | | | | 2 | |
Deferred income taxes | | | 555,414 | | | | 542,785 | | | | 2 | | | | 585,507 | | | | 542,785 | | | | 8 | |
Operating lease liabilities | | | 139,192 | | | | — | | | | 100 | | | | 135,017 | | | | — | | | | 100 | |
Other long-term liabilities | | | 90,497 | | | | 94,557 | | | | (4 | ) | | | 81,455 | | | | 94,557 | | | | (14 | ) |
Total equity | | | 3,265,408 | | | | 3,216,301 | | | | 2 | | | | 3,374,498 | | | | 3,216,301 | | | | 5 | |
| | $ | 6,300,692 | | | $ | 5,871,594 | | | | 7 | % | | $ | 6,127,885 | | | $ | 5,871,594 | | | | 4 | % |
Current assets as of March 31,September 30, 2019 increased 2%decreased 13% compared with December 31, 2018. Trade accounts receivable increased 5%decreased 8% mainly due to increaseddecreased activities in the inland marine transportation market and in the distribution and services commercial and industrial market. Inventories, net, decreased 3%, primarily reflecting deliveries of new pressure pumping units and international oilfield equipment in the distribution and services oil and gas market, as well aspartially offset by increased activities in the inland marine transportation market. Inventories, net, decreased 19%, primarily reflecting lower inventory levels due to support lowerreduced business activity levels.levels in the oil and gas market.
Property and equipment, net of accumulated depreciation, at March 31,as of September 30, 2019 increased 7% compared with December 31, 2018. The increase reflected $65,954,000$177,658,000 of capital expenditures for the 2019 first quarter of 2019,nine months, more fully described under Capital Expenditures Reflected on the Balance Sheet below, the fair value of the property and equipment acquired in the Cenac acquisition of $246,802,000$247,122,000 and the threenine inland tank barges purchased in Marchduring the 2019 first nine months for $2,970,000,$13,040,000, less $51,115,000$153,468,000 of depreciation expense and $11,971,000$29,855,000 of property disposals during the 2019 first quarter.nine months.
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,September 30, 2019 decreased 2%6% compared with December 31, 2018, primarily due to amortization of intangibles other than goodwill.
Current liabilities as of March 31,September 30, 2019 decreased 4%15% compared with December 31, 2018. Accounts payable decreased 1%24%, primarily due to decreased shipyard maintenance accruals on coastal equipment.reduced business activity levels in the distribution and services oil and gas market. Accrued liabilities decreased 17%9% primarily from payment during the 2019 first quarter of employee incentive compensation bonuses accrued during 2018.2018 and lower accrued incentive compensation during the 2019 first nine months. Current portion of operating lease liabilities increased due to the adoption of ASU 2016-02 on January 1, 2019. Deferred revenues decreased 10%39%, primarily reflecting reduced business activity levels in the distribution and services oil and gas market.
Long-term debt, net – less current portion, as of March 31,September 30, 2019 increased 18%2% compared with December 31, 2018, primarily reflecting the addition of athe five-year Term Loan in an amount of $500,000,000 on March 27, 2019 with $440,000,000 currently outstanding, offset by net payments of $240,799,000$417,373,000 on the amended and restated Revolving Credit Facility. Net debt discount and deferred issuance costs were $9,117,000$8,389,000 (of which $2,806,000 attributable to the Revolving Credit Facility is currently included in other assets on the balance sheet) and $7,204,000 at March 31,as of September 30, 2019 and December 31, 2018, respectively.
Deferred income taxes as of March 31,September 30, 2019 increased 2%8% compared with December 31, 2018, primarily reflecting the 2019 first quarternine months deferred tax provision of $12,490,000.$40,502,000.
Operating lease liabilities increased due to the adoption of ASU 2016-02 on January 1, 2019.
Other long-term liabilities as of March 31,September 30, 2019 decreased 4%14% compared with December 31, 2018. The decrease was primarily due to the adoption of ASU 2016-02 on January 1, 2019 and the resulting reclassreclassification of unfavorable leases to operating lease right-of-use assets and the reclassreclassification of deferred rent liabilities to long-term operating lease liabilities and contributions of $1,615,000$2,581,000 to the Higman pension plan during the 2019 first quarter.nine months.
Total equity as of March 31,September 30, 2019 increased 2%5% compared with December 31, 2018. The increase was primarily the result of $44,296,000$139,570,000 of net earnings attributable to Kirby for the 2019 first quarter of 2019,nine months and an increase in additional paid-in capital of $4,150,000, primarily due$9,545,000 related 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.awards.
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 extendsextended the term of the Company’s existing $850,000,000 Revolving Credit Facility to March 27, 2024 and addsadded 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 Ratea base rate calculated with reference to the agent bank’s prime rate, among other factors.Alternate Base Rate. 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 commencingoriginally scheduled to commence 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. During the 2019 third quarter, the Company repaid $60,000,000 and during October 2019, the Company repaid an additional $55,000,000 under the Term Loan prior to the scheduled installments. As a result, no repayments are required until June 30, 2023. 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,September 30, 2019, the Company was in compliance with all Credit Agreement covenants and had no outstanding borrowings under the Revolving Credit Facility of $176,574,000 and $500,000,000$440,000,000 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$5,258,000 as of March 31,September 30, 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. 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. As of March 31,September 30, 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 $500,000,000 of Senior Notes Series A and Senior Notes Series B with a group of institutional investors, consisting of $150,000,000 of 2.72% Senior Notes Series A due February 27, 2020 and $350,000,000 of 3.29% Senior Notes Series B due February 27, 2023. No principal payments are required until maturity. The Senior Notes Series A and Series B contain certain covenants on the part of the Company, including an interest coverage covenant, a debt-to-capitalization covenant and covenants relating to liens, asset sales and mergers, among others. The Senior Notes Series A and Series B also specify certain events of default, upon the occurrence of which the maturity of the notes may be accelerated, including failure to pay principal and interest, violation of covenants or default on other indebtedness, among others. As of March 31,September 30, 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, 2019.2021. The Credit Line allows the Company to borrow at an interest rate agreed to by Bank of America and the Company at the time each borrowing is made or continued. The Company had no borrowings outstanding under the Credit Line as of March 31,September 30, 2019. Outstanding letters of credit under the Credit Line were $1,171,000 as of March 31,September 30, 2019.
Capital Expenditures Reflected on the Balance Sheet
Capital expenditures for the 2019 first quarternine months were $65,954,000,$177,658,000, including $7,937,000$19,746,000 for inland towboat construction, $6,904,000$16,240,000 for progress payments on three 5000 horsepower coastal ATB tugboats, $1,838,000$2,178,000 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 $49,275,000$139,494,000 primarily for upgrading existing marine equipment and marine transportation and distribution and services facilities.
Financing of the construction of the inland 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 creditborrowings under the Company’s Revolving Credit Facility.
During the 2019 first quarter,nine months, the Company acquired 63 inland tank barges from Cenac with a total capacity of approximately 1,833,000 barrels, and retired fivenine inland tank barges, reducingbrought back into service six inland tank barges, and chartered two inland tank barges, increasing its capacity by approximately 91,00054,000 barrels. The net result was an increase of 5862 inland tank barges and approximately 1,742,0001,887,000 barrels of capacity during the 2019 first quarter of 2019.nine months.
The Company projects that capital expenditures for 2019 will be in the $225,000,000 to $245,000,000 range. The 2019 construction program will consist of progress payments on the construction of 13 inland towboats, eightseven of which will behave been placed in service in 2019 and the remaining fivesix are scheduled to be placed in service in 2020 and 2021, and progress payments on the construction of three 5000 horsepower coastal ATB tugboats to be placed in service in 2019.2019, two of which were placed in service during the 2019 first nine months. Based on current commitments, steel prices and projected delivery schedules, the Company’s 2019 progress payments on the new inland towboats will be approximately $20,000,000 to $25,000,000 and 2019 progress payments on the construction of the three 5000 horsepower coastal ATB tugboats will be approximately $20,000,000. Approximately $155,000,000 to $165,000,000 is primarily capital upgrades and improvements to existing marine equipment and facilities. The balance of $25,000,000$30,000,000 to $35,000,000 will be for rental fleet growth, new machinery and equipment, and facilities improvements in the distribution and services segment.information technology projects.
Funding for future capital expenditures is expected to be provided through operating cash flows and available creditborrowings under the Company’s Revolving Credit Facility.
Treasury Stock Purchases
The Company did not purchase any treasury stock during the 2019 first threenine months. As of May 8,November 6, 2019, the Company had approximately 1,400,000 shares available under its existing repurchase authorization. Historically, treasury stock purchases have been financed through operating cash flows and borrowingborrowings 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$387,599,000 in the 2019 first nine months compared with $18,734,000$272,304,000 for the 2018 first quarter.nine months. 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 the CGBM barges in December 2018, and the Cenac fleet in March 2019, as well as improved coastal barge utilization and improved inland bargeand coastal pricing. The increase was also due to a net increase in cash flows from the change in operating assets and liabilities of $6,189,000$85,685,000 due to a decrease in inventories in the distribution and services segment in the 2019 first quarternine months compared to an increase in the 2018 first quarter.nine months.
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 8,November 6, 2019, $685,023,000$833,317,000 under its Revolving Credit Facility and $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.Agreement.
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 March 27, 2024. As of March 31,September 30, 2019, the Company had $667,026,000$844,742,000 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,installments, currently beginning June 30, 2020,2023, 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 2019. For a list of significant risks and uncertainties that could impact cash flows, see Note 15,14, Contingencies, in the financial statements, and Item 1A — Risk Factors and Note 15, Contingencies and Commitments, in the Company’s Annual Report on Form 10-K for the year ended December 31, 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.Financing above.
The Company has issued guaranties or obtained standby letters of credit and performance bonds and guarantees 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 $19,525,000$21,220,000 at March 31,September 30, 2019, including $7,791,000$11,240,000 in letters of credit and $11,734,000$9,980,000 in performance bonds.bonds and guarantees. All of these instruments have an expiration date within two years.in 2021 or earlier. 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. | 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 2019 interest expense by $507,000 based on balances outstanding at December 31, 2018, and would change the fair value of the Company’s debt by 1%.
Item 4. | Item 4. Controls and Procedures |
Disclosure Controls and Procedures.Procedures. The Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that such information required to be disclosed is accumulated and communicated to management, including principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. The 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,September 30, 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, thereReporting. There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31,September 30, 2019 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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
Item 1. Legal Proceedings
The discussion of the legal proceedings related to the M/V Voyager and the legal proceedings related to the tug Nathan E. Stewart and barge DBL 55 in Note 14, Contingencies, of the Notes to Unaudited Consolidated Financial Statements in this Quarterly Report are incorporated by reference into this Item 1.
Item 1A. | Item 1A. Risk Factors |
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.
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.