KEX

KIRBY CORP 10-Q Summary: Quarter Ended March 31, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Kirby Corporation is the nation's largest domestic inland tank barge operator, transporting petrochemicals, black oil products, refined petroleum products, and agricultural chemicals. The company also operates a diesel engine services segment providing overhaul and repair services for marine, power generation, and railroad industries. The reporting period reflects the impact of a global economic recession on demand for both segments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 16% year-over-year. Marine transportation revenue fell 16% to $219.0 million, and diesel engine services revenue fell 15% to $58.6 million, driven by reduced demand in petrochemical, black oil, and railroad markets.
• Profitability Impact: Net earnings attributable to Kirby declined 24% to $28.0 million. Operating income for the diesel engine services segment dropped 54% due to deferred maintenance by customers and lower labor utilization.
• Cost Reductions: The company reduced shore staff by approximately 6% via early retirement incentives and layoffs, incurring a pre-tax charge of $3.95 million ($0.05 per share). This charge was partially offset by lower fuel costs (diesel price dropped 42% to $1.56/gallon) and favorable winter weather reducing delay days by 48%.
• Cash Flow Improvement: Despite lower earnings, operating cash flow increased 33% to $81.4 million, primarily due to a significant decrease in accounts receivable.

Guidance, Outlook, and Risks

• Outlook: Management anticipates demand will stabilize as customers adjust inventories but expects no significant improvement until the U.S. economy expands. The diesel engine services segment is expected to continue performing below 2008 levels.
• Capital Expenditures: Projected 2009 capital expenditures are in the range of $180 million to $190 million, including $135 million for new tank barge and towboat construction. The company expects 2009 new capacity to approximate capacity to be retired.
• Contract Renewals: Approximately 50% of term contracts are up for renewal in 2009. Rates were generally renewed at existing levels, with some traded for longer terms. Spot market rates decreased 3% to 4% compared to Q1 2008.
• Risks:
  • Credit Market Volatility: The company faces risks related to its revolving credit facility and counterparty performance on interest rate swap agreements due to the global credit crisis.
  • Environmental Contingency: The company is a Potentially Responsible Party (PRP) for the Palmer Barge Line Site. The EPA intends to pursue recovery of $2.95 million in costs; the company cannot currently estimate its specific liability.
  • Market Conditions: Excess barge capacity and lower utilization persist due to reduced petrochemical and refining production.

Investor Verification Checklist

• Contract Renewal Rates: Verify the terms of the 50% of term contracts up for renewal in 2009 to ensure rate stability holds.
• Cost Savings Realization: Monitor whether the estimated $0.02 per share savings for 2009 and $0.08 per share for 2010 from staff reductions materialize.
• Capital Expenditure Execution: Track the $180-$190 million capital expenditure plan against cash flow generation to ensure liquidity remains sufficient.
• Environmental Liability: Review updates on the Palmer Barge Line Site to determine if the EPA's cost recovery claim results in a material financial impact.
• Counterparty Risk: Assess the financial health of the multinational banks acting as counterparties to the company's $200 million interest rate swap portfolio.