Kirby Corporation — Form 10-Q Summary
Business context and reporting period
Kirby Corporation is the largest domestic tank barge operator in the United States, transporting petrochemicals, black oil, refined petroleum products and agricultural chemicals. It also provides diesel engine services, including parts, overhauls, remanufacturing and pressure-pumping equipment services.
The filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012. The marine transportation results include the Allied and Penn acquisitions completed in the fourth quarter of 2012.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $558.8 million | $566.9 million | (1)% |
| Operating income | $99.8 million | $89.1 million | 12% |
| Operating margin | 17.9% | 15.7% | Up 220 bps |
| Net earnings attributable to Kirby | $56.6 million | $50.9 million | 11% |
| Diluted EPS | $1.00 | $0.91 | 10% |
| Operating cash flow | $97.8 million | $73.4 million | 33% |
| Capital expenditures | $71.2 million | $61.9 million | 15% |
Marine transportation revenue increased 25% to $418.5 million, and segment operating income increased 30% to $89.3 million. The segment margin improved to 21.3% from 20.4%. Diesel engine services revenue declined 39% to $140.3 million, while operating income declined 40% to $14.0 million; the segment margin was 10.0% versus 10.2%.
Cash flow from operations exceeded capital expenditures by approximately $26.6 million. Net cash used in investing activities was $71.4 million, and net cash used in financing activities was $33.6 million. Cash decreased by $7.2 million during the quarter to $3.8 million at March 31, 2013.
Balance sheet, debt and liquidity
- Total assets were $3.70 billion, up from $3.65 billion at December 31, 2012.
- Total debt was approximately $1.10 billion at March 31, 2013, compared with $1.14 billion at year-end 2012. The debt-to-capitalization ratio declined to 38.4% from 39.9%.
- Debt consisted principally of $500.0 million of senior notes, $455.0 million outstanding under the term loan and $144.5 million under the revolving credit facility. An additional $4.0 million was outstanding under a bank credit line.
- The Company had $180.5 million available under its revolving credit facility at March 31, 2013 and reported compliance with its debt covenants. As of May 3, 2013, reported availability was $223.8 million under the revolving facility and $9.1 million under the credit line.
- The $200.0 million floating-rate senior notes were retired on February 28, 2013 using proceeds from newly issued Senior Notes Series A and Series B.
Material changes versus the prior comparable period
- Revenue was broadly stable overall, but the business mix shifted substantially toward marine transportation: marine revenue represented 75% of total revenue versus 59% in Q1 2012.
- Marine transportation benefited from strong demand, favorable pricing and the Allied and Penn acquisitions. Inland tank barge utilization was generally 90% to 95%, while coastal utilization was approximately 90%.
- Diesel engine services weakened materially because of lower pressure-pumping unit manufacturing and reduced land-based diesel engine and transmission activity. Management expects limited improvement in this market until late 2013 or early 2014.
- Interest expense increased 37% to $8.0 million because of acquisition-related borrowings and the new senior notes.
- Q1 2013 included a $4.3 million pretax credit from a decrease in the fair value of the United acquisition earnout liability. Q1 2012 included a $4.2 million earnout charge and a $2.4 million severance charge related to the Kirby Offshore Marine integration.
- Capital expenditures increased, including $55.1 million for inland tank barges and towboats and $6.9 million for offshore dry-bulk barge and tugboat construction.
Guidance, outlook, risks and unusual items
Management projected 2013 capital expenditures of $190 million to $200 million, including construction of 55 inland tank barges, three inland towboats and two offshore articulated dry-bulk barge and tugboat units. Future capital spending is expected to be funded with operating cash flow and available credit.
Management described petrochemical and black oil demand as strong, supported by domestic petrochemical production, low-cost natural gas feedstock, refinery activity and crude oil movements. Coastal markets improved materially from 2012 levels, although additional tank barge capacity could moderate utilization and pricing.
Key risks include economic conditions, industry competition, weather and water conditions, marine accidents, lock delays, fuel costs, interest rates, construction of competing equipment, environmental and government regulation, and the timing and magnitude of acquisitions. Fuel-recovery clauses generally contain a 30-to-90-day lag, creating short-term fuel-cost exposure.
- The Company recorded a $4.9 million contingent liability related to the Allied acquisition, with up to $10 million payable through 2015 based on developments in the sugar provisions of the U.S. Farm Bill. A $5.0 million payment was made during Q1 2013.
- The United acquisition earnout liability was $14.0 million at March 31, 2013, with up to $50 million potentially payable in 2014 depending on financial targets.
- The Company remains involved in a CERCLA matter relating to the Palmer Barge Line Superfund site; the EPA’s updated cost claim was approximately $3.6 million, but the filing does not provide a clear estimate of Kirby’s ultimate share.
- Guaranties, letters of credit and performance bonds had aggregate notional value of $56.2 million. Management does not expect material cash outlays under these instruments.
- All outstanding interest-rate swaps expired on February 28, 2013. A foreign-currency forward contract with a $469,000 notional amount remained outstanding at quarter-end.
Investor verification priorities
- Verify whether marine transportation utilization and pricing remain strong as the Allied and Penn acquisitions are fully integrated.
- Monitor the recovery, or continued weakness, in pressure-pumping equipment manufacturing and land-based diesel engine services.
- Reconcile projected 2013 capital expenditures of $190 million to $200 million with operating cash flow, debt repayment and fleet expansion.
- Review term-loan amortization, revolving-facility availability and compliance with debt covenants.
- Assess the potential cash impact of the United earnout and Allied contingent liability.
- Track exposure to weather, water levels, fuel-price recovery lags, environmental claims and additional industry tank-barge capacity.
- Confirm the effect of the Q1 2013 earnout credit when evaluating recurring operating performance and earnings quality.