Kirby Corporation Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation is the largest U.S. domestic tank barge operator, transporting petrochemicals, black oil, refined petroleum products and agricultural chemicals. It also provides diesel engine services and manufactures or remanufactures oilfield service equipment. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparisons to the same 2015 periods.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Revenue | $441.6 million | $543.2 million | $900.3 million | $1,130.8 million |
| Operating income | $66.8 million | $98.1 million | $132.2 million | $201.2 million |
| Net earnings attributable to Kirby | $38.9 million | $58.1 million | $77.0 million | $119.2 million |
| Diluted EPS | $0.72 | $1.04 | $1.43 | $2.13 |
| Operating margin | 15.1% | 18.1% | 14.7% | 17.8% |
| Net cash from operating activities | Not separately provided | Not separately provided | $209.9 million | $245.9 million |
Marine transportation generated $378.3 million of second-quarter revenue and $756.6 million for the first six months, representing 86% and 84% of consolidated revenue, respectively. Its operating margins were 19.2% and 18.8%, compared with 22.8% and 22.9% in the prior-year periods.
Diesel engine services generated $63.3 million of second-quarter revenue and $143.7 million for the first six months. Operating losses were $2.0 million and $2.8 million, compared with operating income of $4.9 million and $13.8 million in the prior-year periods.
At June 30, 2016, cash and cash equivalents were $2.9 million. Long-term debt, net of current portion, was $798.7 million, consisting principally of $295.2 million drawn on the revolving credit facility, $500.0 million of senior notes and $7.1 million under a separate credit line, before debt issuance costs. The debt-to-capitalization ratio was 25.4%, unchanged from December 31, 2015. The company was in compliance with its debt covenants.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue declined 19% and six-month revenue declined 20%, primarily from lower diesel fuel prices passed through to customers, weaker marine contract pricing and utilization, and the collapse in demand for land-based oilfield equipment.
- Second-quarter net earnings attributable to Kirby declined 33%; six-month earnings declined 35%. Diluted EPS declined from $1.04 to $0.72 in the quarter and from $2.13 to $1.43 year to date.
- Marine transportation operating income declined 25% in the quarter and 26% year to date. Inland utilization fell into the high-80% to low-90% range in the quarter, while coastal utilization declined to the mid-80% range.
- Inland term-contract rates renewed during the quarter and first six months declined approximately 5% to 8% from comparable 2015 renewals.
- Diesel engine services revenue declined 46% in the quarter and 50% year to date, and the segment moved to operating losses because of weak oilfield activity, reduced equipment manufacturing and deferred marine maintenance projects.
- Operating cash flow declined 15% year to date, while capital expenditures fell to $111.0 million from $190.2 million. Investing cash flow nevertheless remained negative at $228.9 million because of acquisitions and capital spending.
- Property and equipment, net, increased 5% from year-end 2015 to $2.9 billion, reflecting capital spending and acquired equipment. Total assets increased 3% to $4.3 billion.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2016 capital expenditures of approximately $230 million to $250 million, funded by operating cash flow and available credit.
- Management expected third-quarter inland and coastal tank barge utilization in the low-to-mid-80% range and remained cautious on inland pricing because of excess industry capacity, weak crude-related volumes and additional competitive capacity.
- The land-based diesel engine services market was expected to remain challenging through the second half of 2016. Marine diesel services were also expected to remain weak, although deferred maintenance could improve later results if customers authorize projects.
- On April 15, 2016, Kirby acquired Seacor’s inland fleet for $91.7 million, including 27 inland tank barges, 13 towboats and equipment under construction. It also acquired four coastal tugboats for $26.5 million and an 80,000-barrel coastal tank barge for $13.5 million.
- The first six months included $5.6 million of pretax severance charges related to workforce reductions. The comparable 2015 period included $1.2 million of severance charges and a $1.6 million pretax gain from the sale of a small product line.
- The company expected to contribute $20 million to $30 million to its pension plan before December 31, 2016; no 2016 contribution had been made as of June 30.
- Kirby remains involved in litigation, environmental claims and potential Clean Water Act penalties arising from the 2014 Houston Ship Channel collision and oil discharge. Management believes insurance and reserves are adequate and does not expect a material adverse effect, but the matter remained ongoing.
- Other significant risks include economic and commodity volatility, competition and excess vessel capacity, weather and navigational disruptions, marine accidents, fuel costs, interest rates, environmental regulation and acquisition execution.
Important Facts for Investors to Verify
- Verify the extent to which lower fuel prices, contract-rate declines and utilization losses continue to affect marine transportation revenue and margins.
- Monitor inland and coastal utilization, contract renewals, spot-market exposure and the effect of new industry vessel capacity.
- Assess whether the diesel engine services segment can return to profitability, particularly in oilfield equipment manufacturing and deferred maintenance.
- Reconcile planned 2016 capital expenditures and acquisition-related spending with operating cash flow, debt balances and revolving-credit availability.
- Track the Houston Ship Channel litigation, environmental claims and potential penalties, including developments in the damages trial and OPA negotiations.
- Review pension funding requirements, debt covenant compliance and available liquidity, including the reported $273.6 million of revolving-credit availability as of August 5, 2016.