Kirby Corporation 2015 Third-Quarter Form 10-Q Summary
Business context and reporting period
Kirby Corporation is the largest domestic tank barge operator in the United States. Its two reportable segments are Marine Transportation and Diesel Engine Services. The filing covers the quarter and nine months ended September 30, 2015, with unaudited financial statements.
As of September 30, 2015, Kirby operated 899 inland tank barges with 17.9 million barrels of capacity, 69 coastal tank barges with 5.9 million barrels of capacity, and related towing assets. The diesel engine services segment serves marine, power generation and land-based oilfield customers.
Financial performance and key metrics
| Metric | Three months ended September 30, 2015 | Three months ended September 30, 2014 | Nine months ended September 30, 2015 | Nine months ended September 30, 2014 |
|---|---|---|---|---|
| Revenue | $532.6 million | $680.7 million | $1.663 billion | $1.898 billion |
| Operating income | $95.1 million | $128.1 million | $296.3 million | $362.0 million |
| Net earnings attributable to Kirby | $56.8 million | $76.7 million | $176.0 million | $214.0 million |
| Diluted EPS | $1.04 | $1.34 | $3.17 | $3.74 |
| Operating margin | 17.9% | 18.8% | 17.8% | 19.1% |
| Net margin attributable to Kirby | 10.7% | 11.3% | 10.6% | 11.3% |
Marine Transportation revenue was $418.3 million in the third quarter and $1.263 billion for the nine-month period, representing 79% and 76% of consolidated revenue, respectively. Marine operating income was $93.7 million and $286.9 million, with margins of 22.4% and 22.7%.
Diesel Engine Services revenue was $114.2 million in the third quarter and $400.1 million for the nine-month period. Operating income was $5.6 million and $19.4 million, with margins of 4.9% and 4.8%.
Net cash provided by operating activities was $377.5 million for the first nine months of 2015, compared with $325.6 million in the prior-year period. Capital expenditures were $265.2 million, acquisitions of marine equipment were $41.3 million, and net cash used in investing activities was $293.4 million. Net cash used in financing activities was $105.9 million. Cash and cash equivalents declined to $2.5 million from $24.3 million at December 31, 2014.
At September 30, 2015, total debt was $810.4 million, consisting of $310.4 million outstanding under the revolving credit facility and $500.0 million of senior notes. Debt-to-capitalization was 26.4%, compared with 24.0% at December 31, 2014. The company had $244.9 million available under its revolving credit facility and $9.1 million available under its separate credit line as of November 4, 2015.
Material changes versus the prior comparable period
- Consolidated third-quarter revenue declined 22% and nine-month revenue declined 12%.
- Third-quarter and nine-month net earnings attributable to Kirby decreased 26% and 18%, respectively; diluted EPS declined 22% and 15%.
- Marine Transportation revenue declined 7% in the third quarter and 6% for the nine-month period. Lower marine diesel fuel prices, which are largely passed through to customers, heavier coastal shipyard activity and weaker inland contract rates were principal factors.
- Marine operating margins declined from 25.0% to 22.4% in the third quarter and from 24.3% to 22.7% for the nine-month period. Higher labor and pension costs, shipyard activity, depreciation and major-maintenance amortization also pressured results.
- Diesel Engine Services revenue declined 51% in the third quarter and 28% for the nine-month period, while operating income declined 72% and 59%. Weak crude oil prices, reduced drilling activity and delayed or canceled pressure-pumping equipment orders significantly affected the land-based business.
- Debt increased primarily because the company borrowed under its new revolving facility to fund share repurchases, equipment purchases and refinancing of a $100.0 million term loan. The revolving facility was extended to April 30, 2020.
- The company repurchased 2.675 million shares for $202.2 million during the first nine months and held 5.415 million treasury shares at September 30, 2015.
Guidance, outlook, risks and unusual items
- Management projected 2015 capital expenditures of $320 million to $330 million, funded through operating cash flow and available credit.
- Management expected fourth-quarter inland and coastal utilization to remain in the 90% to 95% range, but anticipated modest inland pricing pressure, challenging winter weather and continued Gulf Intracoastal Waterway lock closures.
- The land-based diesel engine services market was expected to generate an operating loss in the 2015 fourth quarter. A significant portion of the equipment backlog had been delayed into 2016, and staffing in land-based manufacturing had been reduced by approximately 40%.
- Third-quarter diesel engine services results included $0.7 million of severance charges; first-quarter results included $1.1 million of severance charges.
- In the third quarter, the company shortened the estimated useful lives of certain coastal fleet assets, increasing depreciation and major-maintenance amortization by approximately $3.5 million.
- UE Compression LLC was classified as held for sale at September 30, 2015 and was sold in the fourth quarter. Assets held for sale were $18.4 million and liabilities held for sale were $6.2 million; the sales price was approximately equal to book value, subject to post-closing adjustments.
- The company expected to contribute up to $10.0 million to its pension plan before December 31, 2015; no 2015 contribution had been made as of September 30.
- Material contingencies include litigation and environmental claims arising from the 2014 Houston Ship Channel collision and the Gulfco Superfund site. Management stated that adequate reserves and insurance coverage were in place and did not expect a material adverse effect.
- Letters of credit, performance bonds and guaranties had aggregate notional value of $23.5 million at September 30, 2015. Management did not expect material cash outlays under these instruments.
- Key risks include fuel prices, interest rates, weather and water conditions, lock delays, marine accidents, environmental regulation, industry competition, customer demand, oilfield activity, contract pricing and execution of the capital program.
Important facts for investors to verify
- Whether Marine Transportation utilization remains strong enough to offset inland pricing pressure, excess industry capacity and higher labor, pension, shipyard and depreciation costs.
- The pace of recovery, if any, in land-based oilfield equipment demand and the timing of delayed backlog deliveries.
- Progress against the $320 million to $330 million 2015 capital expenditure plan and the resulting effect on leverage and liquidity.
- Compliance with the revolving credit facility and senior-note covenants as debt remains elevated and cash balances are low.
- Final proceeds and accounting treatment for the UEC sale, including post-closing adjustments.
- Developments in the Houston Ship Channel collision, Gulfco environmental matter and other legal or regulatory proceedings.
- The effect of the planned pension contribution and future pension assumptions on earnings, equity and cash flow.