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KEX > SEC Filings for KEX > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for KIRBY CORP

Form 10-Q for KIRBY CORP


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Statements contained in this Form 10-Q that are not historical facts, including, but not limited to, any projections contained herein, are forward-looking statements and involve a number of risks and uncertainties. Such statements can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate" or "continue," or the negative thereof or other variations thereon or comparable terminology. The actual results of the future events described in such forward-looking statements in this Form 10-Q could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are:
adverse economic conditions, industry competition and other competitive factors, adverse weather conditions such as high water, low water, tropical storms, hurricanes, tsunamis, fog and ice, marine accidents, lock delays, fuel costs, interest rates, construction of new equipment by competitors, government and environmental laws and regulations, and the timing, magnitude and number of acquisitions made by the Company. For a more detailed discussion of factors that could cause actual results to differ from those presented in forward-looking statements, see Item 1A-Risk Factors found in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Forward-looking statements are based on currently available information and the Company assumes no obligation to update any such statements.

For purposes of the Management's Discussion, all net earnings per share attributable to Kirby common stockholders are "diluted earnings per share." The weighted average number of common shares applicable to diluted earnings per share for the three months and nine months ended September 30, 2012 and 2011 were as follows:

                                              Three months ended           Nine months ended
                                                September 30,                September 30,
                                              2012          2011           2012          2011
                                                              (in thousands)
Weighted average number of common stock
- diluted                                      55,627        55,371         55,634        54,066

The increase in the weighted average number of common shares for the 2012 third quarter compared with the 2011 third quarter reflected the issuance of restricted stock and the exercise of stock options, while the increase for the 2012 first nine months compared with the 2011 first nine months reflected the issuance of 1,939,234 shares of Company common stock associated with the July 1, 2011 acquisition of K-Sea, the issuance of restricted stock and the exercise of stock options.

Overview

The Company is the nation's largest domestic tank barge operator, transporting bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, along all three United States coasts, and in Alaska and Hawaii. The Company transports petrochemicals, black oil products, refined petroleum products and agricultural chemicals by tank barge. As of September 30, 2012, the Company operated a fleet of 853 inland tank barges, including 49 leased barges, with 16.9 million barrels of capacity, and operated an average of 246 inland towboats during the 2012 third quarter, of which an average of 64 were chartered. The Company's coastal fleet consisted of 53 tank barges, of which 12 are leased and three are single hull, with 3.7 million barrels of capacity, and 63 owned coastal tugboats. The Company also owns four offshore barge and tug units transporting dry-bulk commodities in United States coastal trade. Through its diesel engine services segment the Company provides after-market services for medium-speed and high-speed diesel engines, reduction gears and ancillary products for marine and power generation applications, and distributes and services high-speed diesel engines, transmissions, pumps and compression products, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, for the land-based pressure pumping and oilfield service markets.

For the 2012 third quarter, net earnings attributable to Kirby were $53,055,000, or $.95 per share, on revenues of $521,324,000, compared with 2011 third quarter net earnings attributable to Kirby of $52,734,000, or $.94 per share, on revenues of $563,582,000. For the 2012 first nine months, net earnings attributable to Kirby were $151,550,000, or $2.70 per share, on revenues of $1,600,107,000, compared with 2011 first nine months net earnings attributable to Kirby of $126,856,000, or $2.33 per share, on revenues of $1,300,272,000. The 2012 third quarter results included a $400,000 before taxes credit and the 2012 first nine months results included a $3,900,000 before taxes, or $.04 per share, charge to selling, general and administrative expense, resulting from a net increase in the fair value of the contingent earnout liability associated with the April 2011 acquisition of United. This compares with a charge to selling, general and administrative expenses increasing the fair value of the contingent earnout liability for the 2011 third quarter by $380,000 before taxes and $2,600,000 before taxes, or $.03 per share, for the first nine months of 2011. The 2012 third quarter and first nine months included an estimated $.03 to $.04 per share negative impact from low water throughout the Mississippi River System, net of certain revenue and cost recovery from contracts with terms that provide reimbursements for delays and increased costs, and the impact of Hurricane Isaac which made landfall near the mouth of the Mississippi River on August 28, 2012 as a category 1 storm, impacting both the marine transportation and diesel engine services operations. The 2012 first nine months operating results also included a $2,920,000 before taxes, or $.03 per share, severance charge associated with the integration of Kirby Offshore Marine's administrative functions into the Company. The 2011 first nine months included an estimated $.07 per share negative impact from high water and flooding throughout the Mississippi River System and along the Gulf Intracoastal Waterway in the Morgan City area during the 2011 second quarter, net of certain revenue and cost recovery from contracts with terms that provide reimbursements for delays and increased costs.


Marine Transportation

For the 2012 third quarter and first nine months, 67% and 64%, respectively, of the Company's revenue was generated by its marine transportation segment. The segment's customers include many of the major petrochemical and refining companies that operate in the United States. Products transported include intermediate materials used to produce many of the end products used widely by businesses and consumers - plastics, fiber, paints, detergents, oil additives and paper, among others, as well as residual fuel oil, ship bunkers, asphalt, gasoline, diesel fuel, heating oil and agricultural chemicals. Consequently, the Company's inland marine transportation business tends to mirror the volumes produced by the Company's petrochemical and refining customer base, while the Company's coastal marine transportation business tends to mirror the general performance of the United States economy. The results include the operations of Kirby Offshore Marine, acquired on July 1, 2011, and described below.

The Company's marine transportation segment's revenue for the 2012 third quarter was relatively consistent with the 2011 third quarter, while the revenue for the 2012 first nine months increased 20% compared with revenue for the 2011 first nine months. The segment's operating income for the 2012 third quarter and first nine months increased 5% and 17%, respectively, when compared with operating income for the 2011 third quarter and first nine months. The higher marine transportation revenues and higher operating income for the 2012 first nine months reflected the acquisition of Kirby Offshore Marine on July 1, 2011. During the 2012 third quarter, demand across all inland markets remained strong. Driven by a low-cost natural gas feedstock advantage afforded to United States petrochemical producers, petrochemical demand remained strong and also benefited from resumed normal levels of production at several major customer plants which had maintenance downtime during the 2012 second quarter. Black oil demand also remained strong, driven by continued stable refinery output, healthy export levels of heavy fuel oil, and the movement of Canadian and Bakken crude oil from the Midwest to the Gulf Coast, as well the movement of South Texas crude oil along the Gulf Intracoastal Waterway and in the Gulf of Mexico. Refined product demand remained positive, benefiting from additional volumes from major customers. Agricultural chemical demand was favorable, as demand returned early for the traditional fall fertilizer season.

The Company's inland petrochemical and black oil products fleets achieved tank barge utilization levels in the 90% to 95% range during the 2012 third quarter and first nine months compared with a low 90% range during the 2011 first quarter and 90% to 95% range during the 2011 second, third and fourth quarters. Diesel fuel prices for the 2012 third quarter decreased 5% compared with the 2011 third quarter thereby negatively impacting marine transportation revenues and increased 5% for the 2012 first nine months thereby positively impacting marine transportation revenue. Fuel is escalated and de-escalated through revenue adjustment clauses in customers' term contracts, or the customer pays for the fuel.

During the 2012 and 2011 third quarters and first nine months, approximately 75% of marine transportation's inland revenues were under term contracts and 25% were spot contract revenues, thereby providing the operations with a predictable revenue stream. Inland operation time charters, which insulate the Company from revenue fluctuations caused by weather and navigational delays and temporary market declines, represented 58% and 57%, respectively, of the revenues under term contracts during the 2012 third quarter and first nine months compared with 54% and 55%, respectively, during the 2011 third quarter and first nine months. Rates on inland operations term contracts renewed in the 2012 first, second and third quarters increased in the 4% to 6% average range compared with term contracts renewed in the corresponding quarters of 2011. Spot contract rates, which include the cost of fuel, increased modestly during the 2012 first, second and third quarters compared with the prior quarters. Effective January 1, 2012, annual escalators for labor and the producer price index on a number of multi-year contracts resulted in rate increases on those contracts in the 2% range, excluding fuel.

The coastal operations, which primarily transport refined petroleum products, experienced typical market conditions during the 2012 third quarter with overall equipment utilization levels in the 75% to 80% range compared with 75% equipment utilization for the 2012 first six months. During the 2012 third quarter, the Atlantic, Pacific, Alaska and Hawaii markets reported higher utilization levels, while the New York Harbor market saw continued softness and excess capacity that resulted in lower equipment utilization levels and competitive bidding for available movements.

During the 2012 third quarter and first nine months, approximately 60% of the marine transportation coastal revenues were under term contracts and 40% were spot contract revenues. Coastal time charters represented approximately 90% of the revenues under term contracts during the 2012 third quarter and first nine months. For the coastal operations, no term contracts were renewed in the 2012 third quarter. For the 2012 first six months, term contracts renewals were relatively stable compared with term contracts renewed in the 2011 first six months, and spot contract rates during the 2012 third quarter were up in the 4% to 6% average range compared with the 2012 second quarter. Spot contract rates for the 2012 first and second quarters were relatively stable compared with the corresponding prior quarter.


The marine transportation operating margin for the 2012 third quarter was 23.4% compared with 22.2% for the 2011 third quarter, and 21.6% for the 2012 first nine months compared with 22.0% for the 2011 first nine months. This reflected strong inland tank barge utilization levels and higher term and spot contract pricing, partially offset by the impact of unfavorable weather conditions. Also, the coastal operations had a high single digit operating margin for the 2012 third quarter and mid single digit operating margin for the first nine months, including the 2012 first nine months' severance charge of $2,920,000 discussed above.

Diesel Engine Services

For the 2012 third quarter and first nine months, 33% and 36%, respectively, of the Company's revenue was generated by its diesel engine services segment, of which 21% and 30% was generated from manufacturing, 60% and 51% from overhauls and service, and 19% and 19% from direct parts sales, respectively. The results of the diesel engine services segment are largely influenced by the economic cycles of the marine and power generation markets and the land-based pressure pumping and oilfield services industries. The results include the operations of United, acquired on April 15, 2011.

The Company's diesel engine services segment's 2012 third quarter and first nine months revenue decreased 19% and increased 30%, respectively, and operating income decreased 31% and increased 17%, respectively, when compared with the third quarter and first nine months of 2011. The increase in revenue and operating income for the 2012 first nine months reflected the acquisition of United on April 15, 2011. During the 2012 third quarter and first nine months, low natural gas prices led to a decline in drilling for natural gas in North American shale formations, resulting in lower demand for the manufacturing of land-based pressure pumping units, as well as a decline in the service of land-based diesel engines and sales of engines, transmissions and parts. Partially offsetting the decline in the manufacturing of pressure pumping units was the demand for manufacturing of blenders, double-pumpers, cementers and fire pumps, as well as an increase in the number of pressure pumping units to be remanufactured. The 2012 third quarter results included a $400,000 credit and the 2012 first nine months results included a $3,900,000 charge to selling, general and administrative expense, resulting from a net increase in the fair value of the contingent earnout liability associated with the April 2011 acquisition of United. This compares with a charge to selling, general and administrative expenses increasing the fair value of the contingent earnout liability for the 2011 third quarter and first nine months by $380,000 and $2,600,000, respectively.

During the 2012 third quarter and first nine months, the marine diesel engine services market reflected signs of strengthening and benefited from large overhaul projects for major domestic and international customers, as well as higher service work for oil service customers as Gulf of Mexico oil and gas drilling activity increased during the 2012 first nine months. However, the Gulf Coast and Midwest markets were negatively impacted by the low water conditions on the Mississippi River System and Hurricane Isaac, with certain overhaul projects deferred into the fourth quarter or into 2013. The power generation market benefited from major engine-generator set upgrades and parts sales for both domestic and international customers.

The diesel engine services segment's operating margin for the 2012 third quarter was 8.5% compared with 10.0% for the 2011 third quarter. For the 2012 first nine months, the operating margin was 9.3% compared with 10.3% for the first nine months of 2011. The decline in the operating margin for both periods reflected the 2012 second and third quarter curtailment in the manufacturing of pressure pumping units and softer land-based diesel engines and transmissions sales and service, as well as lower margins on the remanufacturing of pressure pumping units during the startup phase. Partially offsetting these declines were favorable operating margins earned in the power generation market.

Cash Flow and Capital Expenditures

The Company continued to generate strong operating cash flow during the 2012 first nine months, with net cash provided by operating activities of $246,228,000 compared with $215,326,000 of net cash provided by operating activities for the 2011 first nine months. The 14% increase was primarily from higher net earnings attributable to Kirby, higher depreciation and amortization and a higher deferred tax provision in the 2012 first nine months versus the 2011 first nine months, partially offset by a $28,774,000 greater net decrease in cash flows from changes in operating assets and liabilities. In addition, during the 2012 and 2011 first nine months, the Company generated cash of $3,173,000 and $349,000, respectively, from the exercise of stock options and $15,165,000 and $3,967,000, respectively, from proceeds from the disposition of assets.

For the 2012 first nine months, cash generated and borrowings under the Company's revolving credit facility were used for capital expenditures totaling $255,887,000, including $123,154,000 for new inland tank barge and towboat construction, $44,295,000 for progress payments on the construction of two offshore dry-bulk barge and tugboat units scheduled for completion in the 2012 fourth quarter, and $88,438,000 primarily for upgrading the existing marine transportation inland and coastal fleets and diesel engine services facilities. The Company's debt-to-capitalization ratio decreased to 32.5% at September 30, 2012 from 35.5% at December 31, 2011, primarily due to the increase in total equity from net earnings attributable to Kirby for the 2012 first nine months of $151,550,000, the exercise of stock options, the amortization of unearned equity compensation and a reduction of $20,035,000 of debt outstanding. As of September 30, 2012, the Company had $91,970,000 outstanding under its revolving credit facility, $481,000,000 outstanding under its term loan, of which $58,500,000 was classified as current portion of long-term debt, $200,000,000 outstanding under its senior notes and $9,000,000 outstanding under its short-term line of credit.


The Company projects that capital expenditures for 2012 will be in the $305,000,000 to $315,000,000 range, including approximately $130,000,000 for the construction of 55 inland tank barges and five inland towboats and approximately $70,000,000 in progress payments on the construction of two offshore dry-bulk barge and tugboat units for delivery in the 2012 fourth quarter with an estimated total cost of $52,000,000 for each unit. During the 2012 first nine months, the Company's inland operation took delivery of 53 new inland tank barges, increasing capacity by 972,000 barrels, added 17 inland tank barges from Lyondell that the Company previously operated for Lyondell, increasing capacity by 243,000 barrels, received four tank barges from the coastal fleet, increasing capacity by 91,000 barrels, and retired 37 inland tank barges and returned three chartered inland tank barges, reducing its capacity by 635,000 barrels. The Company's inland operation also took delivery of three inland towboats during the 2012 first nine months.

Based on current commitments, steel prices and projected delivery schedules, the Company's 2013 new construction capital expenditures will consist of 56 inland tank barges with a total capacity of approximately 1,200,000 barrels and three inland towboats for delivery throughout 2013. The cost is approximately $130,000,000, the majority of which will be expended in 2013.

Outlook

Petrochemical and black oil products inland tank barge utilization levels remained strong during the 2012 first nine months in the 90% to 95% range. While the United States economy remains sluggish, with consistently high unemployment levels and weak consumer confidence, the United States petrochemical industry continues to see strong production levels for both domestic consumption and exports. Low-priced domestic natural gas, a basic feedstock for the United States petrochemical industry, provides the industry with a competitive advantage against foreign petrochemical producers. As a result, United States petrochemical production improved during 2011 and has remained strong during the 2012 first nine months, thereby producing increased marine transportation volumes for basic petrochemicals to both domestic consumers and terminals for foreign destinations. The black oil products market also continued to improve during 2011 and the 2012 first nine months, primarily due to a continued stable United States refinery utilization level aided by the export of diesel fuel and heavy fuel oil, and demand for the transportation of crude oil from shale formations in South Texas, as well as the movement of Canadian and Bakken crude oil from the Midwest to the Gulf Coast. The coastal tank barge trade, moving primarily refined products, is more reflective of the weaker United States economy with volumes well below peak levels reached in 2007.

The United States petrochemical industry is globally competitive based on a number of factors, including a highly integrated and efficient transportation system of pipelines, tank barges, railroads and trucks, largely depreciated yet well maintained and operated facilities, and a low cost feedstock slate, which includes natural gas. Certain United States producers have announced plans for plant capacity expansions and the reopening of idled petrochemical facilities. The current production volumes from the Company's petrochemical customers have resulted in the Company's inland tank barge utilization levels in the low to mid 90% range and any increased production from current facilities, plant expansions or the reopening of idled facilities should drive feedstock and production volumes higher, in turn leading to higher tank barge utilization levels and higher term and contract pricing, which could be mitigated by additional tank barge capacity.

During 2009 and 2010, the marine transportation segment was negatively impacted by excess industry inland tank barge capacity. At the end of 2011, the Company estimated there were approximately 3,100 inland tank barges in the industry fleet, of which approximately 500 were over 35 years old and approximately 300 of those over 40 years old. Given the age profile of the industry inland tank barge fleet, the expectation is that older tank barges will continue to be removed from service and replaced by new tank barges that will enter the fleet. During 2011 and early 2012, with the improved demand for inland petrochemical and black oil product tank barges and federal tax incentives on new equipment, the Company estimates that approximately 265 inland tank barges were ordered industry-wide for delivery throughout 2012. Many older tank barges will be retired, but the extent of the retirements is dependent on 2012 petrochemical and refinery production levels, crude oil movements and industry-wide tank barge utilization levels.

During 2011 and the first nine months of 2012, the marine transportation segment was negatively impacted by excess coastal tank barge capacity. At the end of 2011, the Company estimated there were approximately 275 tank barges operating in the 185,000 barrel or less coastal industry fleet. The Company estimates that approximately 8% of the approximate 275 coastal tank barges are single hull and will be removed from service between 2012 and the mandatory retirement date for single hull tank barges of December 31, 2014. The Company presently operates three single hull tank barges in the coastal trade, less than 1% of its barrel capacity.

In the diesel engine services segment, with the recent increase in drilling rigs operating in the Gulf of Mexico during late 2011 and the first nine months of 2012, service activity levels have reflected a modest improvement and should continue to modestly improve as drilling activity increases. The land-based diesel engine services market consists of manufacturing and remanufacturing of oilfield service equipment, including pressure pumping units, and servicing their components, which include high-speed diesel engines, transmissions and pumps, many of the same components used by marine customers. Currently, an estimated 16.5 million horsepower is employed in the North American pressure pumping business. With the current low price of natural gas, the exploration of United States natural gas shale formations declined, resulting in excess pressure pumping horsepower. However, with the current high price of crude oil, the exploration of United States crude oil shale formations has remained positive. As a result of the excess pressure pumping horsepower, new orders for pressure pumping units has essentially stopped and the supply and distribution portion of the land-based market has slowed. While the Company expects its land-based diesel engine business to remain profitable, it does not expect any significant improvement in this market until late 2013 or early 2014. The focus of the Company, currently as well as into the future, will be on the remanufacturing and servicing of existing pressure pumping equipment.


Acquisitions

On November 1, 2012, the Company purchased from Allied 10 coastal tank barges with a total capacity of 680,000 barrels, three offshore dry-bulk barges with a total capacity of 48,000 deadweight tons and seven coastal tugboats for $116,000,000 in cash, before post-closing adjustments, including $10,000,000 that will be paid contingent on developments with the sugar provisions in the United States Farm Bill. Allied provided coastal transportation of petrochemicals as well as dry sugar products in the Northeast, Atlantic and Gulf Coast regions of the United States. Financing of the equipment acquisition was through the Company's revolving credit facility.

On December 15, 2011, the Company completed the purchase of the coastal tank barge fleet of Seaboats, consisting of three 80,000 barrel coastal tank barges and tugboats for $42,745,000 in cash. The three coastal tank barges and tugboats currently operate along the United States East Coast and had an average age of five years. Financing of the equipment acquisition was through the Company's revolving credit facility.

On July 1, 2011, the Company completed the acquisition of K-Sea, now named Kirby Offshore Marine, an operator of tank barges and tugboats participating in the coastal transportation primarily of refined petroleum products in the United States. The total value of the transaction was $603,427,000, excluding transaction fees, consisting of $227,617,000 of cash paid to K-Sea common and preferred unit holders and the general partner, $262,791,000 of cash to retire K-Sea's outstanding debt, and $113,019,000 through the issuance of 1,939,234 shares of Company common stock valued at $58.28 per share, the Company's closing share price on July 1, 2011. The transaction was financed through a combination of the new $540,000,000 term loan and the issuance of Company common stock.

On the acquisition date, Kirby Offshore Marine's fleet, comprised of 57 coastal tank barges with a capacity of 3.8 million barrels and 63 tugboats, operated along the East Coast, West Coast and Gulf Coast of the United States, as well as in Alaska and Hawaii. Kirby Offshore Marine's tank barge fleet, 54 of which were double hulled and had an average age of approximately nine years, is one of the youngest fleets in the coastal trade. Kirby Offshore Marine's customers include major oil companies and refiners, many of which are current Company customers for inland tank barge services. Kirby Offshore Marine has operating facilities in New York, Philadelphia, Seattle and Honolulu.

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