Kirby Corporation 2014 Q2 Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation is a domestic marine transportation operator and diesel engine services provider. The filing covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Marine transportation represented 73% of first-half revenue and diesel engine services represented 27%.
- Marine fleet at June 30, 2014: 874 inland tank barges with 17.3 million barrels of capacity, 71 coastal tank barges with 6.0 million barrels of capacity, 76 coastal tugboats, and seven offshore dry-bulk barge and tug units.
- Shares outstanding on August 5, 2014: 57.06 million.
Financial Performance and Key Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Revenue | $628.1 million | $563.9 million | $1.217 billion | $1.123 billion |
| Operating income | $127.0 million | $109.3 million | $233.9 million | $209.1 million |
| Net earnings attributable to Kirby | $75.0 million | $63.1 million | $137.2 million | $119.7 million |
| Diluted EPS | $1.31 | $1.11 | $2.40 | $2.10 |
| Operating margin | 20.2% | 19.4% | 19.2% | 18.6% |
| Net margin attributable to Kirby | 11.9% | 11.2% | 11.3% | 10.7% |
- Marine transportation revenue increased 8% in the quarter and 6% year to date; operating income increased 19% and 14%, respectively. Segment margins were 25.4% versus 23.0% in Q2 and 23.9% versus 22.2% year to date.
- Diesel engine services revenue increased 22% in the quarter and 16% year to date, but operating income declined 4% and 6%, respectively. Segment margins were 8.4% versus 10.7% in Q2 and 8.3% versus 10.3% year to date.
- Net cash provided by operating activities was $251.4 million for the first six months, compared with $269.3 million in 2013.
- Capital expenditures were $163.3 million, compared with $168.2 million in the prior-year period. Net cash used in investing activities was $159.4 million.
- Net cash used in financing activities was $93.1 million. Cash declined by $1.1 million to $2.9 million at June 30, 2014.
- Debt outstanding was approximately $649.3 million at June 30, 2014, down from $749.2 million at December 31, 2013. The debt-to-capitalization ratio declined to 23.0% from 27.0%.
- At June 30, 2014, debt consisted principally of $500.0 million of senior notes, $142.0 million under the term loan, and $7.3 million under the revolving credit facility. Estimated debt fair value was $628.3 million.
- Available borrowing capacity at August 5, 2014 was $319.0 million under the revolving credit facility and $9.1 million under the separate credit line.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue increased 11% in Q2 and 8% for the first six months; diluted EPS increased 18% and 14%, respectively.
- Marine transportation benefited from strong demand, 90% to 95% tank-barge utilization, favorable pricing, and a higher proportion of term-contract revenue. Inland term-contract revenue represented approximately 80% of inland revenue versus 75% in the prior-year periods.
- Inland term-contract renewals increased approximately 3% to 5%, while coastal term-contract renewals increased approximately 7% to 9%.
- Diesel engine services revenue grew substantially, led by land-based diesel engine and transmission activity and oilfield service equipment manufacturing. Profitability was pressured by higher costs and the absence of favorable 2013 accounting credits.
- Q2 and first-half 2013 included $6.1 million and $10.4 million, respectively, of SG&A credits from reductions in the United acquisition earnout liability. These credits benefited prior-year diesel engine services margins.
- First-half 2014 included a $2.8 million pretax severance charge and an estimated $0.03 per-share combined adverse impact from winter-related delays, extra horsepower costs, and the Houston Ship Channel incident.
- Interest expense declined 24% in Q2 and 27% year to date, primarily because of lower average debt.
- Current assets increased 22% and current liabilities increased 36% from year-end, partly reflecting higher receivables, insurance claim receivables, claims payable, shipyard accruals, and deferred revenue.
Guidance, Outlook, Risks, and Unusual Items
- Management projected 2014 capital expenditures of approximately $370 million to $380 million, funded through operating cash flow and available credit.
- Planned construction includes inland tank barges and towboats, two 185,000-barrel coastal articulated units, and additional coastal units. In July 2014, the company announced two 155,000-barrel coastal units at a combined estimated cost of $125 million to $130 million.
- Marine transportation outlook remained favorable, supported by petrochemical production, refinery activity, crude oil and condensate movements, and high utilization. Management noted that additional industry capacity could moderate pricing and utilization.
- Diesel engine services management expected modest softness in marine activity from seasonality, stable power-generation demand, and continued improvement in land-based oilfield equipment activity during the second half of 2014.
- The March 22, 2014 collision involving the M/V Miss Susan resulted in an oil discharge and ongoing claims and litigation. The company expects additional claims but believes insurance coverage and reserves are adequate and does not expect a material adverse financial effect.
- Guaranties, letters of credit, and performance bonds totaled $46.9 million at June 30, 2014. Management did not expect material cash outlays under these instruments.
- Key risks include marine accidents and pollution, weather and navigational disruptions, fuel costs, interest rates, competition and new vessel construction, economic conditions, environmental regulation, industry cycles, and acquisition execution.
- ASU 2014-09, the new revenue-recognition standard effective for the company January 1, 2017, was under evaluation; the company had not selected a transition method or determined the financial statement impact.
Important Facts for Investors to Verify
- Whether the Houston Ship Channel claims, litigation, reserves, and insurance recoveries remain consistent with management’s assessment.
- Execution, timing, and final cost of the $370 million to $380 million 2014 capital program and subsequent vessel commitments.
- Whether marine utilization and contract-rate increases remain sustainable as new industry capacity enters service.
- Whether diesel engine services margins improve after the comparison benefit from the 2013 earnout-liability credits is removed.
- Compliance with senior-note, revolving-credit, and term-loan covenants, including the scheduled term-loan amortization and 2015-2016 facility maturities.
- The eventual effect and transition method selected for ASU 2014-09.