Business Context and Reporting Period
Kirby Corporation, the largest domestic tank barge operator, filed this unaudited Form 10-Q for the quarter ended June 30, 2015. Operations comprise Marine Transportation and Diesel Engine Services. Marine Transportation serves inland and coastal markets for petrochemicals, black oil, refined petroleum products and agricultural chemicals; Diesel Engine Services provides engine services, parts, power-generation products and oilfield equipment.
At June 30, 2015, Kirby operated 912 inland tank barges with 18.1 million barrels of capacity, 69 coastal tank barges with 6.0 million barrels of capacity and related towing vessels. The filing compares the three and six months ended June 30, 2015 with the corresponding 2014 periods.
Financial Performance and Liquidity
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Total revenue | $543.2 million | $628.1 million | $1,130.8 million | $1,217.3 million |
| Operating income | $98.1 million | $127.0 million | $201.2 million | $233.9 million |
| Net earnings attributable to Kirby | $58.1 million | $75.0 million | $119.2 million | $137.2 million |
| Diluted EPS | $1.04 | $1.31 | $2.13 | $2.40 |
| Operating margin | 18.1% | 20.2% | 17.8% | 19.2% |
| Net cash from operations | Not separately provided | Not separately provided | $245.9 million | $251.4 million |
Revenue declined 13.5% in the second quarter and 7.1% in the first six months. Net earnings attributable to Kirby declined 22.6% and 13.2%, respectively. The lower results primarily reflected weakness in Diesel Engine Services and lower Marine Transportation revenue and margins.
- Marine Transportation: Revenue was $425.1 million in the second quarter and $845.0 million for six months, down 7% and 5%, respectively. Operating income declined 16% and 9%; operating margins were 22.8% and 22.9%, compared with 25.4% and 23.9% in the prior-year periods.
- Diesel Engine Services: Revenue was $118.1 million in the second quarter and $285.9 million for six months, down 31% and 12%. Operating income declined 66% and 49%; margins were 4.2% and 4.8%, compared with 8.4% and 8.3%.
- Cash flow and investment: Six-month operating cash flow of $245.9 million funded $190.2 million of capital expenditures, a $41.3 million acquisition of six inland pressure tank barges and $138.9 million of treasury stock purchases, supplemented by borrowings.
- Debt and liquidity: Total debt was $808.3 million at June 30, 2015, consisting of $308.3 million outstanding under the revolving facility and $500.0 million of senior notes. Cash was $5.0 million. The company reported $248.2 million of availability under its revolving facility and separate credit line as of August 6, 2015, and compliance with applicable debt covenants.
- Capitalization: Debt-to-capitalization increased to 26.4% from 24.0% at December 31, 2014, primarily due to borrowings and share repurchases.
Material Changes Versus the Prior Comparable Period
- Marine Transportation revenue was pressured by a 35% to 36% decline in marine diesel fuel prices, which is largely passed through to customers, lower inland contract rates and heavier coastal shipyard activity.
- Marine margins also reflected higher labor and pension costs, preparation costs for new coastal equipment and the lag in fuel-price escalators.
- Diesel Engine Services was materially affected by lower crude oil prices, reduced drilling activity and the resulting decline in demand for pressure-pumping equipment, remanufacturing, parts and services. A significant portion of backlog was deferred into 2016.
- Net earnings benefited from a $1.6 million pretax gain on the sale of a small Diesel Engine Services product line, partly offset by $1.2 million of severance charges in the first six months. The 2014 comparable period included $2.8 million of severance charges and approximately $0.03 per share of adverse effects from ice-related operating conditions and the 2014 Houston Ship Channel incident.
- Property and equipment, net increased 5% to $2.7 billion, while current assets declined 16% and current liabilities declined 35%, mainly reflecting lower receivables, reduced business activity and refinancing of debt maturities.
- The company repurchased 1.783 million shares for $138.9 million during the first six months and an additional 477,000 shares for $36.4 million from July 1 through July 23, 2015.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2015 capital expenditures of $315 million to $325 million, funded through operating cash flow and available credit.
- Marine utilization was expected to remain approximately 90% to 95% in the second half of 2015. Management expected inland pricing on renewals to remain similar to second-quarter levels, while continued coastal shipyard activity was expected to weigh on results.
- Management anticipated challenging third-quarter inland operating conditions from high water and river and lock closures, with July conditions more pronounced than usual.
- The land-based Diesel Engine Services business was expected to generate an operating loss during the remaining two quarters of 2015. Staffing in land-based manufacturing had been reduced approximately 40%.
- Key risks include economic conditions, industry competition, weather and water conditions, marine accidents, lock delays, fuel costs and fuel-price escalation timing, interest rates, environmental regulation, new competitor capacity, and acquisition timing.
- The company is involved in ongoing litigation and claims arising from the March 2014 M/V Miss Susan collision and oil discharge, and in CERCLA-related litigation concerning the Gulfco Marine Maintenance Superfund site. Management believes reserves and insurance coverage are adequate and does not expect a material adverse effect, but the proceedings remain ongoing.
- Guaranties, letters of credit and performance bonds totaled $28.5 million at June 30, 2015. Management did not expect material cash outlays under these instruments.
- The company expected to contribute up to $5.0 million to its pension plan before December 31, 2015; no 2015 contribution had been made as of June 30.
Investor Verification Items
- Verify the sustainability of 90% to 95% fleet utilization and the effect of inland pricing pressure, excess industry capacity and fuel-escalator timing on Marine Transportation margins.
- Monitor the Diesel Engine Services backlog, customer deferrals into 2016, land-based operating losses and the recovery of oilfield-related demand.
- Reconcile projected 2015 capital expenditures with operating cash flow, debt-funded spending and the company’s continued share repurchases.
- Review revolving-credit covenants, available capacity, variable-rate exposure and debt maturities, particularly the 2020 revolving facility and Series A notes and the 2023 Series B notes.
- Assess developments, reserves and insurance recoveries related to the M/V Miss Susan and Gulfco environmental matters.
- Confirm the impact of upcoming accounting standards for revenue recognition, inventory measurement and debt issuance costs; the filing states that the company was still evaluating certain effects.