Business Context and Reporting Period
Kirby Corporation filed its Form 10-Q for the quarterly period ended September 30, 2009. The Company is the nation's largest domestic inland tank barge operator, transporting petrochemicals, black oil products, refined petroleum products, and agricultural chemicals. It also operates a diesel engine services segment providing overhaul and repair services for marine, power generation, and railroad industries. The reporting period reflects the ongoing impact of the global economic recession, which reduced demand across both business segments.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Total Revenues | $272,166 | $354,647 | $822,570 | $1,033,477 |
| Net Earnings (Kirby) | $35,014 | $41,778 | $96,739 | $118,759 |
| Diluted EPS | $0.65 | $0.77 | $1.79 | $2.19 |
| Operating Cash Flow (9mo) | $237,101 (2009) vs $183,448 (2008) | |||
| Cash & Equivalents | $39,762 (Sep 30, 2009) | |||
| Total Debt | $200,398 (Sep 30, 2009) | |||
| Debt-to-Capitalization | 16.6% (Sep 30, 2009) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 23% in Q3 2009 and 20% for the first nine months of 2009 compared to the prior year. This was driven by lower demand in petrochemical, black oil, and agricultural chemical markets due to the recession.
- Profitability: Net earnings attributable to Kirby decreased 16% in Q3 and 18% for the nine-month period. Operating income for the Marine Transportation segment decreased 11% (Q3) and 14% (9mo), while Diesel Engine Services operating income dropped 56% (Q3) and 46% (9mo).
- Cost Reductions: The Company reduced shore staff by approximately 6% in Q1 2009 via early retirements and reductions, incurring a $3.95 million charge. This resulted in lower SG&A expenses and reduced fuel consumption due to fewer towboats operated (average 215 in Q3 2009 vs. 255 in Q3 2008).
- Balance Sheet: Cash and cash equivalents increased significantly to $39.8 million from $8.6 million at year-end 2008. Long-term debt decreased 19% to $200 million as the Company utilized strong operating cash flows to pay down borrowings.
Guidance, Outlook, and Risks
- Outlook: Management expects petrochemical and refining production to remain below 2008 levels for the remainder of 2009. No notable improvement is forecasted for the Diesel Engine Services segment in Q4 2009 as customers continue to defer maintenance.
- Capital Expenditures: Projected 2009 capital expenditures are in the range of $185 million to $195 million. For 2010, the Company intends to build 55 new tank barges with new construction costs anticipated at approximately $60 million.
- Contract Renewals: Term contract renewals in Q2 and Q3 2009 declined in the 0-8% and 7-15% ranges, respectively, compared to 2008. Spot market rates decreased 10-20% in Q3 2009 compared to the prior year.
- Risks:
- Environmental: The Company is a Potentially Responsible Party (PRP) for the Palmer Barge Line Superfund site; the EPA intends to pursue recovery of $2.95 million, though the Company's specific liability is currently unestimable. A new EPA inquiry regarding a vapor release in August 2009 is pending.
- Market: Continued economic recession, adverse weather conditions, and fuel price volatility.
- Counterparty: Risks related to the performance of financial institutions holding interest rate swap agreements.
Investor Verification Checklist
- Verify the sustainability of the 29% increase in operating cash flow, which was aided by a significant decline in accounts receivable due to lower business activity.
- Monitor the impact of the $3.95 million restructuring charge taken in Q1 2009 on future earnings, as management estimates it will result in $0.08 per share savings in 2010.
- Assess the risk of further spot market rate declines and contract renewal pressures in the fourth quarter of 2009.
- Review the status of the Palmer Barge Line Superfund liability and the new EPA vapor release inquiry for potential future accruals.
- Confirm the execution of the 2010 capital expenditure plan, specifically the construction of 55 new tank barges, against available liquidity and credit facilities.