Kirby Corporation 2014 Q3 Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Kirby operates two reportable segments: marine transportation of bulk liquid products and diesel engine services, including marine, power-generation and land-based oilfield equipment services.
At September 30, 2014, the marine fleet included 870 inland tank barges with 17.3 million barrels of capacity, 70 coastal tank barges with 6.0 million barrels of capacity, 76 coastal tugboats and seven offshore dry-bulk barge and tug units.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $680.7 million | $551.1 million | $1.898 billion | $1.674 billion |
| Operating income | $128.1 million | $118.3 million | $362.0 million | $327.4 million |
| Net earnings attributable to Kirby | $76.7 million | $69.1 million | $214.0 million | $188.8 million |
| Diluted EPS | $1.34 | $1.21 | $3.74 | $3.32 |
| Operating margin | 18.8% | 21.5% | 19.1% | 19.6% |
| Net margin attributable to Kirby | 11.3% | 12.5% | 11.3% | 11.3% |
Net cash provided by operating activities was $325.6 million for the first nine months of 2014, compared with $450.7 million in the prior-year period. Capital expenditures were $234.1 million, and net cash used in investing activities was $232.5 million. Net cash used in financing activities was $93.4 million. Cash and cash equivalents were $3.7 million at September 30, 2014.
Total assets increased to $4.0 billion from $3.7 billion at December 31, 2013. Current assets increased 31% to $714.7 million, while current liabilities increased 33% to $459.1 million. Long-term debt, excluding current maturities, declined to $649.4 million from $749.2 million. Total debt outstanding was approximately $699.4 million, consisting principally of $500.0 million of senior notes, $100.0 million under the term loan, $45.0 million under the revolving credit facility and $4.35 million under a credit line.
The debt-to-capitalization ratio declined to 22.4% from 27.0% at year-end 2013. Kirby reported $280.0 million of unused capacity under its revolving credit facility at September 30, 2014 and stated that it was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 23.5%, while nine-month revenue increased 13.4%.
- Third-quarter net earnings attributable to Kirby increased 11.0%; nine-month earnings increased 13.3%.
- Marine transportation revenue increased 3% in the quarter and 5% for the first nine months. Nine-month marine operating income increased 8%, but third-quarter operating income declined 1%.
- Marine operating margin declined to 25.0% from 26.1% in the quarter, primarily because of petrochemical and refinery outages, additional chartered horsepower and changes in the Florida bunkering operation. The nine-month margin improved to 24.3% from 23.5%.
- Diesel engine services revenue increased 102% in the quarter and 41% for the first nine months. Operating income increased 121% and 24%, respectively. The segment benefited from improved land-based diesel engine and transmission activity and increased oilfield equipment manufacturing and remanufacturing.
- Diesel engine services margin improved to 8.6% from 7.9% in the quarter but declined to 8.5% from 9.6% for the first nine months. Prior-year results included favorable credits of $7.9 million in the quarter and $18.3 million for the nine months from reductions in a contingent earnout liability.
- Interest expense declined 22% in the quarter and 26% for the first nine months, primarily reflecting lower average debt balances.
- Operating cash flow declined 28%, largely because working-capital changes used cash, including higher receivables and inventory associated with increased activity in diesel engine services.
Guidance, Outlook, Risks and Unusual Items
Management projected 2014 capital expenditures of $370 million to $380 million, funded through operating cash flow and available credit. The company had substantial vessel construction commitments, including inland barges and towboats and four coastal articulated tank barge and tugboat units scheduled for delivery from 2015 through 2017. Construction delays shifted delivery of five inland barges into the first quarter of 2015.
Marine tank barge utilization remained strong at approximately 90% to 95% in the inland and coastal markets. Management cited strong petrochemical, black oil and refined petroleum product demand, improving contract rates and continued demand for crude oil and natural gas condensate transportation. The diesel engine services outlook called for stable marine and power-generation activity and continued improvement in land-based oilfield equipment activity during the fourth quarter.
Reported 2014 results included a $2.8 million pretax first-quarter severance charge and an estimated $0.03-per-share combined adverse impact from heavy ice conditions, additional horsepower requirements and costs related to the March 2014 Houston Ship Channel incident. Management stated that the incident was adequately insured and reserved and was not expected to have a material adverse effect, although litigation, claims and environmental restoration processes remained ongoing.
Other risks include adverse economic conditions, competition, weather and navigational disruptions, marine accidents, fuel costs, interest rates, environmental and governmental regulation, construction delays and the timing and magnitude of acquisitions. Standby letters of credit and performance bonds had an aggregate notional value of $43.1 million; management did not expect material cash outlays under these instruments.
Kirby adopted no new accounting standard materially affecting the period. The company was evaluating the future impact and transition method for ASU 2014-09, Revenue from Contracts with Customers, effective January 1, 2017.
Most Important Facts for Investors to Verify
- Whether sustained 90% to 95% utilization and improving contract rates offset vessel additions, construction delays and competitive capacity.
- The sustainability and profitability of the sharp recovery in diesel engine services, particularly land-based oilfield equipment demand.
- Cash conversion and working-capital requirements, given the significant decline in operating cash flow despite higher earnings.
- Execution of the $370 million to $380 million 2014 capital-spending plan and the funding impact of multiyear vessel construction commitments.
- Progress, insurance recoveries, reserves and ultimate exposure related to the Houston Ship Channel collision and oil spill.
- Debt repayment requirements, covenant compliance and refinancing needs as the revolving facility matures in November 2015 and the term loan matures in July 2016.
- The eventual accounting and disclosure effects of ASU 2014-09.