Kirby Corporation 2012 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation is a domestic tank-barge operator and diesel engine services provider. The filing covers the quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods. Marine Transportation includes inland and coastal tank-barge operations; Diesel Engine Services provides engine, transmission, power-generation and oilfield equipment services.
As of June 30, 2012, Kirby operated 818 inland tank barges with 16.4 million barrels of capacity, 57 coastal tank barges with 3.9 million barrels of capacity, and 64 coastal tugboats. The results include a full period of Kirby Offshore Marine, acquired in July 2011, and United, acquired in April 2011.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $511.8 million | $437.3 million | $1,078.8 million | $736.7 million |
| Operating income | $83.7 million | $71.5 million | $172.8 million | $127.1 million |
| Operating margin | 16.4% | 16.3% | 16.0% | 17.3% |
| Net earnings attributable to Kirby | $47.6 million | $41.7 million | $98.5 million | $74.1 million |
| Net margin attributable to Kirby | 9.3% | 9.5% | 9.1% | 10.1% |
| Diluted EPS | $0.85 | $0.77 | $1.76 | $1.38 |
- Segment performance: Marine Transportation revenue increased 28% in the quarter and 33% for the six months; operating income increased 23% and 26%, respectively. Diesel Engine Services revenue decreased 1% in the quarter but increased 75% for the six months, while operating income decreased 14% in the quarter and increased 60% for the six months.
- Segment margins: Marine Transportation margins were 21.0% in the quarter and 20.7% for the six months, versus 21.9% and 21.8% in the prior-year periods. Diesel Engine Services margins were 8.9% and 9.7%, versus 10.3% and 10.6%.
- Operating cash flow: $136.6 million in the first six months, up from $117.8 million in the prior-year period.
- Investing cash flow: $147.2 million used in the first six months, including $153.8 million of capital expenditures. No business acquisitions were made during the period.
- Cash and liquidity: Cash declined to $5.8 million from $16.2 million at December 31, 2011. As of August 3, 2012, availability was $165.4 million under the revolving credit facility and $1.2 million under the separate credit line.
- Debt: Total reported debt was approximately $799.5 million at June 30, 2012, consisting principally of $494.0 million under the term loan, $105.0 million under the revolving facility, $200.0 million of senior notes and $0.5 million under the credit line. Debt-to-capitalization was 33.9%, compared with 35.5% at year-end 2011.
- Balance sheet: Total assets were $3.07 billion, up from $2.96 billion at December 31, 2011. Inventory increased 31% to $170.9 million, while total equity increased 7% to $1.56 billion.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings benefited from the full-period contribution of Kirby Offshore Marine and United, stronger inland petrochemical and black-oil demand, improved inland utilization and higher contract pricing.
- Marine Transportation was affected by low Mississippi River water levels, light barge loading and temporary customer plant maintenance. Coastal operations continued to experience excess capacity and soft conditions in the New York Harbor and Atlantic markets.
- Diesel Engine Services was pressured by lower natural-gas prices, reduced natural-gas drilling, lower fracturing-unit manufacturing, order cancellations or postponements and weaker land-based service activity. Marine and power-generation service work partly offset these conditions.
- Interest expense increased 80% in the quarter and 92% for the six months due primarily to acquisition-related borrowings, although average effective interest rates declined from the prior-year periods.
- Margins declined for the six months partly because of lower Diesel Engine Services profitability, coastal operations’ low single-digit margins, integration costs and the increased United earnout liability.
Guidance, Outlook, Risks and Unusual Items
- Capital spending outlook: Management projects 2012 capital expenditures of $290 million to $300 million, including approximately $130 million for 58 inland tank barges and five towboats and approximately $70 million of progress payments for two offshore dry-bulk barge and tugboat units. Planned 2013 new construction is approximately $130 million.
- Operating outlook: Management expects continued support from strong U.S. petrochemical production, refinery utilization, crude-oil movements and inland utilization in the low-to-mid 90% range. Coastal markets remain weaker, and the land-based oilfield-services market is affected by low natural-gas prices and a shift toward crude-oil exploration.
- Unusual charges: The six-month results included a $4.3 million pretax increase in the United contingent earnout liability and $2.9 million of severance costs related to Kirby Offshore Marine integration. Second-quarter charges were $0.1 million and $0.5 million, respectively.
- Debt maturity and refinancing: The $200 million senior notes mature in February 2013. The filing states that $59.6 million was classified as current and that the company had the ability and intent to refinance a portion through the revolving facility.
- Contingencies: Kirby is involved in several CERCLA environmental matters, including Gulfco, Portland Harbor, Palmer and State Marine. Potential liability allocations remain incomplete for certain sites. A Fair Labor Standards Act collective action involving vessel tankermen has been conditionally certified, but the company cannot estimate a loss. A separate putative securities class action related to K-Sea was amended in July 2012; management believes it is without merit and does not expect a material adverse effect, although no assurance is provided.
- Other commitments: Letters of credit and performance bonds totaled $36.2 million at June 30, 2012. Management does not expect material cash outlays under these instruments.
- Risk factors: Key risks include economic conditions, competition, weather and water levels, marine accidents, fuel costs, interest rates, regulatory and environmental requirements, industry capacity, oilfield-services demand, acquisitions and counterparty performance on hedges.
Important Facts for Investors to Verify
- Whether the company refinanced or repaid the $200 million senior notes due February 2013 and maintained compliance with debt covenants.
- Whether projected 2012 capital expenditures of $290 million to $300 million were funded from operating cash flow and available credit without materially increasing leverage.
- Trends in inland tank-barge utilization, coastal utilization and contract-rate renewals, particularly amid coastal excess capacity.
- Recovery in Diesel Engine Services’ land-based oilfield activity, fracturing-unit manufacturing and remanufacturing margins.
- Inventory levels and working-capital conversion following the 31% increase in inventory.
- Developments, reserves and potential exposure relating to the environmental matters, tankerman overtime litigation and K-Sea securities litigation.
- Realized effects of fuel escalation clauses, interest-rate swaps, foreign-currency hedges and counterparty performance.