Business Context and Reporting Period
Kirby Corporation (NYSE: KEX) is a leading provider of inland marine transportation and diesel engine services. The company operates two primary segments: Marine Transportation, which transports petrochemicals, black oil products, refined petroleum products, and agricultural chemicals via tank barges on U.S. inland waterways; and Diesel Engine Services, which provides overhaul, repair, and parts sales for marine, power generation, and railroad applications. This summary covers the fiscal year ended December 31, 2009.
Key Financial Metrics (2009)
| Metric | 2009 Value | 2008 Value |
|---|---|---|
| Total Revenues | $1,082.2 million | $1,360.2 million |
| Net Earnings (Kirby) | $125.9 million | $157.2 million |
| Diluted EPS | $2.34 | $2.91 |
| Operating Cash Flow | $319.9 million | $245.9 million |
| Capital Expenditures | $192.7 million | $173.0 million |
| Total Assets | $1,636.0 million | $1,526.1 million |
| Long-Term Debt | $200.2 million | $247.3 million |
| Cash & Equivalents | $97.8 million | $8.6 million |
Segment Performance:
- Marine Transportation: Revenues of $881.3 million (down 20%); Operating Income of $208.1 million (down 15%); Operating Margin of 23.6% (up from 22.4%).
- Diesel Engine Services: Revenues of $200.9 million (down 24%); Operating Income of $21.0 million (down 47%); Operating Margin of 10.5% (down from 15.0%).
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 21% compared to 2008, driven by the U.S. and global economic recession which reduced demand for petrochemicals, refined products, and agricultural chemicals. Diesel engine services also saw deferred maintenance by customers.
- Cost Reductions: The company implemented significant cost-cutting measures, including shore staff reductions of approximately 21% from peak levels, resulting in charges of $8.8 million in 2009. These actions, combined with lower fuel costs (average diesel price dropped from $3.21/gal in 2008 to $1.72/gal in 2009), helped maintain operating margins in the marine segment despite lower volumes.
- Asset Optimization: The company reduced its active towboat fleet from an average of 256 in 2008 to 220 in 2009 and retired 101 older tank barges to align capacity with lower demand.
- Liquidity Improvement: Cash and cash equivalents surged from $8.6 million to $97.8 million, aided by strong operating cash flow and a decrease in accounts receivable. Long-term debt decreased by $47 million.
Guidance, Outlook, and Risks
Outlook: Management anticipates that term contract renewals in 2010 will occur at lower rates until utilization improves. Spot contract rates are expected to be driven by volumes and equipment utilization. The diesel engine services segment is expected to see some improvement in 2010 after likely reaching the bottom of its business cycle in late 2009.
Capital Expenditures: Projected for 2010 to be in the range of $125 million to $135 million, including approximately $60 million for new tank barge and towboat construction.
Risks and Contingencies:
- Market Conditions: Excess barge capacity and lower utilization due to the economic downturn continue to pressure pricing.
- Environmental/Legal: The company is a Potentially Responsible Party (PRP) for the Palmer Barge Line Site Superfund cleanup; liability is currently unestimable. Additionally, a January 2010 collision involving a company towboat and the S/S Eagle Otome resulted in an 11,000-barrel crude oil spill; the company believes it was not at fault and has adequate insurance.
- Regulatory: Operations are subject to the Jones Act, USCG regulations, and potential climate change legislation (cap-and-trade) which could increase energy costs.
- Customer Concentration: Two customers (SeaRiver and Dow) accounted for approximately 21% of 2009 revenues.
Investor Verification Checklist
- Contract Renewals: Verify the rate environment for 2010 term contract renewals, as management expects lower rates.
- Utilization Rates: Monitor industry-wide barge utilization and retirement rates to assess the timeline for capacity absorption.
- Legal Exposure: Track the resolution of the Palmer Barge Line Site liability and the outcome of the January 2010 Port Arthur oil spill investigation.
- Customer Concentration: Assess the stability of contracts with SeaRiver (Exxon Mobil affiliate) and Dow Chemical, which represent a significant portion of revenue.
- Capital Allocation: Review the execution of the 2010 capital expenditure plan ($125M-$135M) and its impact on cash flow.