Kirby Corporation Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation operates two reportable segments: Marine Transportation, including inland and coastal tank barges and towing vessels, and Diesel Engine Services, including engine servicing, parts distribution, and oilfield equipment manufacturing. The unaudited filing covers the three and nine months ended September 30, 2012, compared with the prior-year periods, and the balance sheet is compared with December 31, 2011.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $521.3 million | $563.6 million | $1.600 billion | $1.300 billion |
| Operating income | $92.6 million | $92.3 million | $265.4 million | $219.4 million |
| Net earnings attributable to Kirby | $53.1 million | $52.7 million | $151.6 million | $126.9 million |
| Diluted EPS | $0.95 | $0.94 | $2.70 | $2.33 |
| Operating margin | 17.8% | 16.4% | 16.6% | 16.9% |
| Operating cash flow | Not separately provided | Not separately provided | $246.2 million | $215.3 million |
Q3 revenue declined 7.5%, while net earnings attributable to Kirby increased 0.6%. For the first nine months, revenue increased 23.1%, net earnings increased 19.5%, and diluted EPS increased 15.9%. The nine-month effective tax rate was approximately 37.8% in both years.
- Marine Transportation: Q3 revenue was $349.8 million, essentially flat year over year, while operating income increased 5% to $81.7 million. The operating margin improved to 23.4% from 22.2%. Nine-month revenue increased 20% to $1.028 billion and operating income increased 17% to $221.9 million; the nine-month margin was 21.6% versus 22.0%.
- Diesel Engine Services: Q3 revenue declined 19% to $171.6 million and operating income declined 31% to $14.6 million. The margin fell to 8.5% from 10.0%. Nine-month revenue increased 30% to $572.2 million and operating income increased 17% to $53.3 million, but the margin declined to 9.3% from 10.3%.
- Liquidity and balance sheet: Cash was $5.1 million at September 30, 2012, down from $16.2 million at year-end 2011. Total assets increased 6% to $3.126 billion, while total equity increased 11% to $1.621 billion. Inventory increased 28% to $166.6 million.
- Debt: Total reported debt was approximately $791.0 million, consisting of $481.0 million under the term loan, $292.0 million under the revolving facility and short-term line, and related current classifications. Debt-to-capitalization decreased to 32.5% from 35.5% at December 31, 2011.
- Capital expenditures: Nine-month capital expenditures were $255.9 million, compared with $163.2 million in the prior-year period. The company projected full-year 2012 capital expenditures of $305 million to $315 million.
Material Changes Versus the Prior Comparable Period
- The nine-month comparison benefited substantially from the July 2011 acquisition of K-Sea, now Kirby Offshore Marine, and the April 2011 acquisition of United.
- Marine Transportation benefited from strong inland petrochemical and black-oil demand, utilization in the low-to-mid 90% range, and higher contract pricing. Approximately 75% of inland revenue was under term contracts.
- Diesel Engine Services weakened in the third quarter because low natural-gas prices reduced drilling activity, pressure-pumping equipment manufacturing, and related service demand. Large overhaul projects were also deferred because of low water conditions and Hurricane Isaac.
- Q3 results included an estimated $0.03 to $0.04 per-share adverse impact from low water on the Mississippi River System and Hurricane Isaac. Nine-month results included a $3.9 million pretax charge related to the United contingent earnout and a $2.9 million pretax severance charge related to integrating Kirby Offshore Marine administrative functions.
- The company’s revolving credit facility was increased to $325 million from $250 million on August 30, 2012. At September 30, $229.5 million remained available under the facility.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected 2012 capital expenditures of $305 million to $315 million and approximately $130 million of 2013 new-construction expenditures for 56 inland tank barges and three towboats.
- Management viewed inland petrochemical and black-oil demand and utilization as strong, supported by low-cost domestic natural gas and refinery activity. Coastal markets remained weaker, with excess capacity and softness in New York Harbor.
- Management expected the land-based diesel engine market to remain profitable but did not expect significant improvement until late 2013 or early 2014. The focus was shifting toward remanufacturing and servicing existing pressure-pumping equipment.
- On November 1, 2012, after quarter-end, Kirby acquired Allied equipment for $116 million in cash, subject to adjustments and including a potential $10 million contingent payment. The acquisition was financed through the revolving facility. Kirby also agreed to acquire Flag Service & Maintenance for $5.1 million, with closing expected in November 2012.
- The $200 million floating-rate senior notes mature in February 2013. The company stated it had the ability and intent to refinance them through the revolving credit facility.
- Contingencies include CERCLA environmental matters, a collective-action overtime lawsuit involving vessel tankermen, and a putative securities class action related to K-Sea. The company could not estimate a loss for the overtime matter and stated that it did not expect the securities matter to have a material adverse effect, although no assurance was given.
- Guaranties, standby letters of credit, and performance bonds had aggregate notional value of $32.1 million. Management did not expect material cash outlays under these instruments.
- Key operating risks include weather and water conditions, marine accidents, fuel costs, interest rates, competition, environmental regulation, industry capacity, and acquisition and integration execution.
Important Facts for Investors to Verify
- Verify refinancing or repayment of the $200 million senior notes due February 2013 and the effect of the Allied acquisition on debt and liquidity.
- Monitor inland tank barge utilization, contract renewals, pricing, industry capacity, and the impact of weather and river conditions.
- Assess whether the diesel engine services downturn, particularly pressure-pumping equipment manufacturing, persists through 2013 and 2014.
- Review acquisition integration costs, the United earnout liability of $26.5 million, and the financial contribution of Kirby Offshore Marine and Allied.
- Evaluate environmental, labor, securities litigation, pension funding, and other contingent liabilities, including the planned $20 million to $25 million pension contribution before year-end 2012.
- Confirm continued compliance with debt covenants and the company’s ability to fund planned capital expenditures from operating cash flow and available credit.